Nominal rigidity and monetary uncertainty in a small open economy

Temporary nominal rigidity is introduced into a dynamic stochastic general equilibrium model of a small open economy. The foreign country is also modelled, and is the closed-economy counterpart of the domestic country. We examine whether a small open economy is more vulnerable than a closed economy to uncertainty over its monetary policy. A signal of an increase in future variability, which was not previously foreseen as a risk by agents, is shown to weaken the current exchange rate and boost current output in the small open economy. In the equivalent closed economy it has no effect on current variables