Monetary policy and multiple equilibria

Jess Benhabib (), Stephanie Schmitt-Grohe () and Martin Uribe

No 1998-29, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: In this paper, we characterize conditions under which interest rate feedback rules whereby the nominal interest rate is set as an increasing function of the inflation rate generate multiple equilibria. We show that these conditions depend not only on the 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 analyze this issue in flexible and sticky price environments. 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 gives rise to multiple equilibria and passive monetary policy renders the equilibrium unique.

Keywords: Monetary policy; Econometrics (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-mon
Date: 1998
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Related works:
Working Paper: Monetary Policy and Multiple Equilibria (1999)
Working Paper: Monetary Policy and Multiple Equilibria (1999)
Working Paper: Monetary Policy and Multiple Equilibria (1998)
Journal Article: Monetary Policy and Multiple Equilibria (2001)
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