Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/94284
Authors: 
Benhabib, Jess
Schmitt-Grohe, Stephanie
Uribe, Martin
Year of Publication: 
1999
Series/Report no.: 
Working Papers, Department of Economics, Rutgers, The State University of New Jersey 1999-14
Abstract: 
In this paper, we characterize 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. We show 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. We provide a number of examples in which, contrary to what is commonly believed, active monetary policy in combination with a fiscal policy that preserves government solvency under all circumstances gives rise to multiple equilibria, and passive monetary policy renders the equilibrium unique. Our general conclusion holds in flexible- and sticky-price environments as well as under backward- or forward-looking interest rate feedback rules.
Subjects: 
Interest rate feedback rules
multiple equilibria
sticky prices
JEL: 
E31
E52
E63
Document Type: 
Working Paper

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