Theory 9 Springer-Verlag 1994 Monetary policy and price level determinacy in a cash-in-advance conomy*

Summary. The paper considers the determinacy ofthe equilibrium price level in the cash-in-advance monetary economy of Lucas and Stokey (1983, 1987), in the case of deterministic "fundamentals". The possibilities both of a multiplicity of perfect foresight equilibria and of "sunspot equilibria " are considered. Two types of monetary policy regimes are considered and compared, one in which the money supply grows at a given exogenous rate (that may be positive or negative), and one in which the nominal interest rate on one-period government debt is pegged at a given non-negative l vel. In the case of constant money growth rate regimes, it is shown that one can easily have both indeterminacy ofperfect foresight equilibrium and existence of sunspot equilibria; indeed, in the case of negative rates of money growth (as called for by Friedman (1969)), both types of indeterminacy necessarily occur. On the other hand, sufficient conditions for uniqueness of equilibrium (and non-existence of equilibria other than a deterministic steady state) are also given, and a class of cases is identified in which a sufficiently high rate of money growth guarantees this. Thus there may be a conflict between the aims of choosing a rat