This is the crucial counter-example to the PIP. Equation (3.49) contains the policy parameters An and ,u21 , so that output can be affected by monetary policy even under rational expectations. As Fischer puts it, the intuitive reason for his result is that ".. . between the time the two-year contract is drawn up and the last year of operation of that contract, there is time for the monetary authority to react to new information about recent economic disturbances" (1977, p. 269). Because of the two-period contracts, half of the workers have implicitly based their contract wage on "stale" information.