Monetary Policy and Multiple Equilibria

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...

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Bibliographic Details
Published in:The American economic review 2001-03, Vol.91 (1), p.167-186
Main Authors: Benhabib, Jess, Schmitt-Grohé, Stephanie, Uribe, Martín
Format: Article
Language:English
Subjects:
Determinacy
Economic models
Economic policy
Economic stability
Economic theory
Economics
Equilibrium
Fiscal policy
Inflation
Inflation rate
Inflation rates
Interest rates
Macroeconomics
Mathematical economics
Monetary economics
Monetary policy
Monetary theory
Nominal interest rates
Political economy
Price levels
Prices
Public policy
Steady state economies
Studies
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Summary: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.
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.91.1.167