Discussion paper

DP890 Nominal Rigidity and Monetary Uncertainty

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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Citation

Rankin, N (1994), “DP890 Nominal Rigidity and Monetary Uncertainty”, CEPR Press Discussion Paper No. 890. https://cepr.org/publications/dp890