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Nominal Rigidity and Monetary Uncertainty

  • Rankin, N.

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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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 417.

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Length: 27 pages
Date of creation: 1993
Date of revision:
Handle: RePEc:wrk:warwec:417
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