Price level determinacy with an interest rate policy rule and rational expectations

This paper reconsiders a result obtained by Sargent and Wallace namely, that price level indeterminacy obtains in their model if the monetary authorities adopt a feedback rule for the interest rate rather than the money stock. It is shown that the indeterminacy vanishes if the interest rate rule is chosen so as to have a desired effect on the expected quantity of money demanded. This holds even if considerable weight is given, in the choice of a rule, to the aim of smoothing interest rate fluctuations.