Nominal Rigidity and Monetary Uncertainty in a Small Open Economy

Neil Rankin

No 1231, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Exchange Rate; Monetary Uncertainty; Nominal Rigidity; Risk Premium (search for similar items in EconPapers)
JEL-codes: E44 F41 (search for similar items in EconPapers)
Date: 1995-08
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Journal Article: Nominal rigidity and monetary uncertainty in a small open economy (1998)
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