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Monetary Policy and Multiple Equilibria

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  • Stephanie Schmitt-Grohe
  • Jess Benhabib
  • Martin Uribe

Abstract

This paper characterizes conditions under which interest-rate feedback rules that set the nominal interest rate as an increasing function of the inflation rate induce aggregate instability by generating multiple equilibria. It shows that these conditions depend not only on the monetary-fiscal regime (as emphasized in the fiscal theory of the price level) but also on the way in which money is assumed to enter preferences and technology. It provides a number of examples in which, contrary to what is commonly believed, active monetary policy gives rise to multiple equilibria and passive monetary policy renders the equilibrium unique.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.91.1.167
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 1 (March)
Pages: 167-186

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:1:p:167-186

Note: DOI: 10.1257/aer.91.1.167
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