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Title: Nominal Rigidity and Monetary Uncertainty in a Small Open Economy

Author(s): Neil Rankin

Publication Date: August 1995

Keyword(s): Exchange Rate, Monetary Uncertainty, Nominal Rigidity and Risk Premium

Programme Area(s): International Macroeconomics

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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Bibliographic Reference

Rankin, N. 1995. 'Nominal Rigidity and Monetary Uncertainty in a Small Open Economy'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1231