Monetary policy and multiple equilibria

Jess Benhabib, Stephanie Schmitt-Grohé, Martín Uribe

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    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.

    Original languageEnglish (US)
    Pages (from-to)167-186
    Number of pages20
    JournalAmerican Economic Review
    Volume91
    Issue number1
    DOIs
    StatePublished - Mar 2001

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    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Benhabib, J., Schmitt-Grohé, S., & Uribe, M. (2001). Monetary policy and multiple equilibria. American Economic Review, 91(1), 167-186. https://doi.org/10.1257/aer.91.1.167