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Nominal rigidity and monetary uncertainty

  • Rankin, Neil

A dynamic, stochastic optimizing macromodel with predetermined money wages and labour market monopoly power is used to examine the effect on current macroeconomic variables of a temporary increase in variability of the future money supply. As a benchmark, we show that under perfect wage-price flexibility `uncertainty irrelevance' holds, when monetary uncertainty is appropriately defined. The introduction of wage stickiness causes future monetary uncertainty to raise the nominal interest rate, with a deflationary impact on current price and output, for plausible parameterizations. It also causes the money wage to be set higher, increasing the `natural' rate of unemployment.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 42 (1998)
Issue (Month): 1 (January)
Pages: 185-199

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Handle: RePEc:eee:eecrev:v:42:y:1998:i:1:p:185-199
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