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Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions

  • Charles T. Carlstrom

    (Federal Reserve Bank of Cleveland)

  • Timothy S. Fuerst

    (Bowling Green State University)

This paper demonstrates that in a standard flexible-price monetary model there exists real indeterminacy whenever the nominal interest rate moves too closely with either current or forecasted inflation. However, an aggressive response to lagged inflation will ensure determinacy. These conclusions are robust to a wide range of calibrations, and a monetary environment that allows for endogenous velocity. The results are affected by the inclusion of investment spending in the transactions constraint. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.2001.0137
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 4 (2001)
Issue (Month): 4 (October)
Pages: 767-789

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Handle: RePEc:red:issued:v:4:y:2001:i:4:p:767-789
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