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: Interest rate feedback rules, multiple equilibria, sticky prices
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