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Nominal Rigidity and Monetary Uncertainty in a Small Open Economy

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  • Rankin, Neil

Abstract

A dynamic stochastic model of a small open monetary economy with infinitely-lived optimizing households is constructed. There are temporary nominal rigidities in the labour market, while in goods and asset markets prices are flexible. Optimizing behaviour in the foreign country is also modelled. The home country is small relative to the foreign country, so the latter is effectively a closed economy. We show that whereas in the closed economy an anticipated increase in monetary variability has no effect on current macroeconomic variables, in the small open economy it weakens the current exchange rate and expands current output.

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  • Rankin, Neil, 1995. "Nominal Rigidity and Monetary Uncertainty in a Small Open Economy," CEPR Discussion Papers 1231, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1231
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    Cited by:

    1. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
    2. The Anh Pham, 2018. "Policy volatility and growth," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 17(2), pages 87-97, July.
    3. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
    4. Ascari, Guido & Rankin, Neil, 2002. "Staggered wages and output dynamics under disinflation," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 653-680, April.
    5. K Blackburn & A Pelloni, 2001. "On the Relationship Between Growth and Volatility in Learning-by-Doing Economies," Centre for Growth and Business Cycle Research Discussion Paper Series 01, Economics, The University of Manchester.
    6. Charles Engel, 2001. "Optimal exchange rate policy: the influence of price setting and asset markets," Proceedings, Federal Reserve Bank of Cleveland, pages 518-547.
    7. Keith Blackburn & Alessandra Pelloni, 2005. "Growth, cycles, and stabilization policy," Oxford Economic Papers, Oxford University Press, vol. 57(2), pages 262-282, April.
    8. Michael B. Devereux & Charles Engel, 2001. "The Optimal Choice of Exchange Rate Regime: Price-Setting Rules and Internationalized Production," NBER Chapters, in: Topics in Empirical International Economics: A Festschrift in Honor of Robert E. Lipsey, pages 163-194, National Bureau of Economic Research, Inc.
    9. Sutherland, Alan, 2005. "Incomplete pass-through and the welfare effects of exchange rate variability," Journal of International Economics, Elsevier, vol. 65(2), pages 375-399, March.
    10. Philippe Bacchetta & Eric van Wincoop, 1998. "Does Exchange Rate Stability Increase Trade and Capital Flows?," Working Papers 98.04, Swiss National Bank, Study Center Gerzensee.
    11. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.
    12. Taylor, John B., 1999. "Staggered price and wage setting in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 15, pages 1009-1050, Elsevier.
    13. Ascari, Guido, 1998. "Superneutrality Of Money In Staggered Wage-Setting Models," Macroeconomic Dynamics, Cambridge University Press, vol. 2(3), pages 383-400, September.
    14. Castillo, Paul & Montoro, Carlos & Tuesta, Vicente, 2009. "Money, Infation and Interest Rate: Does the Link Change when the Policy Instrument Changes?," Working Papers 2009-001, Banco Central de Reserva del Perú.
    15. D Varvarigos, 2004. "Non-neutrality and Uncertainty in a Model of Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 41, Economics, The University of Manchester.
    16. Alan Sutherland, 2005. "Cost-push shocks and monetary policy in open economies," Oxford Economic Papers, Oxford University Press, vol. 57(1), pages 1-33, January.
    17. Casares, Miguel, 2009. "Wage setting actors and sticky wages: Implications for the business cycle and optimal monetary policy," Economic Modelling, Elsevier, vol. 26(3), pages 571-585, May.
    18. Sutherland, Alan, 2006. "The expenditure switching effect, welfare and monetary policy in a small open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1159-1182, July.
    19. B. Gabriela Mundaca & Jon Strand, 2005. "A risk allocation approach to optimal exchange rate policy," Oxford Economic Papers, Oxford University Press, vol. 57(3), pages 398-421, July.

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    More about this item

    Keywords

    Exchange Rate; Monetary Uncertainty; Nominal Rigidity; Risk Premium;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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