Uncertainty and Monetary Policy in a Wage Bargaining Model

Abstract

In a wage bargaining model, increased uncertainty concerning monetary and real aggregates is shown to give rise to a higher equilibrium unemployment rate. Moreover, the equilibrium unemployment rate is found to depend on the choice of monetary policy regime, as this choice affects the uncertainty wage setters face when setting the nominal wage rate. It is also shown that the equilibrium inflation rate may depend on uncertainty in such a way that increased uncertainty gives rise to a higher equilibrium unemployment rate as well as a higher equilibrium inflation rate - or what has been called stagflation.

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