More Macro Musing

First off, just so everyone is clear - I am in no way a macroeconomist. My only course in monetary economics was in the core and I had that as an undergrad. These are simply my only mildly educated thoughts, with the hopes that my commenters can point me to good resources.

Now, two markets which introduce much of the messiness into non-neutrality are the labor market and the housing market. Unfortunately these two markets account for the lion's share of economic activity.

However a few facts are striking to me

(1) Both of these markets entail a good deal of matching. You don't just go out and buy a house, you buy a particular house in a particular location. You don't just take a job, you take a particular job.

(2) There seems to be a great deal of surplus associated with both jobs and housing. For example, you lose a job or you lose the house. Being laid off or being foreclosed on are particularly stressful events in people's lives.

(3) Regardless of whether or not these housing and employment contracts have to be nominally rigid they are nominally rigid. That is, people choose to have jobs that pay a certain amount no matter how good business is and people choose to have mortgages that don't move with interest rates.

The second fact is extremely striking because one can choose a mortgage that moves with the market and can save money by doing so. Yet, few people choose this.


My initial feeling is that the matching produces surplus which leads people to try to secure it by writing contracts with nominal rigidity.

So perhaps there is this sort of problem, some of the variance in the labor and housing markets comes from money and some from real shocks. I want to insure against the real shocks, but how can I write a contract that insures against real shocks without insuring against nominal ones?

We could index for inflation, but that assumes that the shock makes its way through to the price level. House else can you insure against a money shock?