Working Paper: CEPR ID: DP890
Authors: Neil Rankin
Abstract: 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.
Keywords: nominal rigidity; monetary uncertainty; output; interest rates
JEL Codes: E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary uncertainty (E49) | Nominal interest rates (E43) |
| Monetary uncertainty (E49) | Current output (C67) |
| Monetary uncertainty (E49) | Current prices (P22) |
| Monetary uncertainty (E49) | Precautionary money demand (E41) |
| Precautionary money demand (E41) | Nominal interest rates (E43) |
| Precautionary money demand (E41) | Current output (C67) |
| Monetary uncertainty (E49) | Wages (J31) |
| Wages (J31) | Natural rate of unemployment (J64) |
| Monetary uncertainty (E49) | Aggregate demand (E00) |