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Nominal Rigidity and Monetary Uncertainty in a Small Open Economy

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Author Info
Rankin, Neil

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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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1231.

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Date of creation: Aug 1995
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Handle: RePEc:cpr:ceprdp:1231

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Related research
Keywords: Exchange Rate Monetary Uncertainty Nominal Rigidity Risk Premium

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Find related papers by 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

Cited by:
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  1. Maurice Obstfeld & Kenneth Rogoff, 1998. "Risk and Exchange Rates," NBER Working Papers 6694, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Charles Engel, 2000. "Optimal Exchange Rate Policy: The Influence of Price Setting and Asset Markets," NBER Working Papers 7889, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Michael Devereux & Charles Engel, 2000. "The Optimal Choice of Exchange-Rate Regime: Price-Setting Rules and Internationalized Production," Discussion Papers in Economics at the University of Washington 0022, Department of Economics at the University of Washington. [Downloadable!]
    Other versions:
  4. 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 Univeristy of Manchester. [Downloadable!]
  5. Philippe Bacchetta & Eric van Wincoop, 1998. "Does exchange rate stability increase trade and capital flows?," Research Paper 9818, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  6. B. Gabriela Mundaca & Jon Strand, 2004. "A Risk Allocation Approach to Optimal Exchange Rate Policy," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  7. Maurice Obstfeld & Kenneth Rogoff, 1999. "New Directions for Stochastic Open Economy Models," NBER Working Papers 7313, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. 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. [Downloadable!] (restricted)
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This page was last updated on 2008-8-19.

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