NOMINAL RIGIDITY AND MONETARY UNCERTAINTY IN A SMALL OPEN-ECONOMY

Temporary nominal rigidity is introduced into a dynamic stochastic gen eral equilibrium model of a small open economy. The foreign country is also modelled, and is the closed-economy counterpart of the domestic country. We examine whether a small open economy is more vulnerable th an a closed economy to uncertainty over its monetary policy. A signal of an increase in future variability, which was not previously foresee n as a risk by agents, is shown to weaken the current exchange rate an d boost current output in the small open economy. In the equivalent cl osed economy it has no effect on current variables. (C) 1998 Published by Elsevier Science B.V. All rights reserved.