Money and Prices Under Uncertainty

Tomoyuki Nakajima and Herakles Polemarchakis

The Review of Economic Studies, 2005, vol. 72, issue 1, 223-246

Abstract: We study whether monetary economies display nominal indeterminacy: equivalently, whether monetary policy determines the path of prices under uncertainty. In a simple, stochastic, cash-in-advance economy, we find that indeterminacy arises and is characterized by the initial price level and a probability measure associated with state-contingent nominal bonds: equivalently, monetary policy determines an average, but not the distribution of inflation across realizations of uncertainty. The result does not derive from the stability of the deterministic steady state and is not affected essentially by price stickiness. Nominal indeterminacy may affect real allocations in cases we identify. Our characterization applies to stochastic monetary models in general, and it permits a unified treatment of the determinants of paths of inflation. Copyright 2005, Wiley-Blackwell.

Date: 2005
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