NOMINAL RIGIDITY AND MONETARY UNCERTAINTY

A stochastic macromodel with dynamically optimising wage-setting house holds is used to examine the effect on current macroeconomic variables of an anticipated increase in variability of the money stock. There i s a nominal rigidity in the form of a money wage set one period in adv ance, in whose absence monetary uncertainty has no effect on current v ariables. We show that, for plausible parameterisations, monetary unce rtainty combined with nominal rigidity raises the nominal interest rat e, depressing aggregate demand and hence current price and output. It also causes the wage to be set higher, increasing the 'natural' rate o f unemployment.