Real indeterminacy in monetary models with nominal interest rate distortions

This paper demonstrates that in a standard flexible-price monetary model th ere exists real indeterminacy whenever the nominal interest rate moves too closely with either current or forecasted inflation. However, an aggressive response to lagged inflation will ensure determinacy. These conclusions ar e robust to a wide range of calibrations, and a monetary environment that a llows for endogenous velocity. The results are affected by the inclusion of investment spending in the transactions constraint. Journal of Economic Li terature Classification Numbers: E4, E5. (C) 2001 Academic Press.