Nominal rigidity and monetary uncertainty

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