Monetary Policy and Multiple Equilibria

23 Pages Posted: 14 Aug 1998

See all articles by Jess Benhabib

Jess Benhabib

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Stephanie Schmitt-Grohé

Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 11, 1998

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.

JEL Classification: E52, E31, E63

Suggested Citation

Benhabib, Jess and Schmitt-Grohe, Stephanie and Uribe, Martin, Monetary Policy and Multiple Equilibria (May 11, 1998). Board of Governors of the Federal Reserve System, FEDS No. (98-29), Available at SSRN: https://ssrn.com/abstract=113548 or http://dx.doi.org/10.2139/ssrn.113548

Jess Benhabib

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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Stephanie Schmitt-Grohe (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

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Martin Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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