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Indeterminacy of equilibrium price of money, market price of risk and interest rates

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  • Keiichi Tanaka

    (Graduate School of Economics, Osaka University)

Abstract

This paper shows that a market price of nominal risk plays an important role in the determinacy of the price of money under a stochastic continuous-time monetary economy. It is presented that a sufficient condition for the determinacy of the price of money is either an exogenously given nominal short rate or an exogenously given market price of nominal risk, which implies that a different market price of nominal risk may yield a different price of money. Thus the nominal pricing kernel is not endogenously determined under the original assumptions of the model. If central banks can determine not only the money supply but also the nominal short rate process, the policy leads to the determinacy of a process of the price of money and the pricing kernels. Explicit solutions for real quantities and nominal quantities are provided for two cases of utility functional forms.

Suggested Citation

  • Keiichi Tanaka, 2003. "Indeterminacy of equilibrium price of money, market price of risk and interest rates," Economics Bulletin, AccessEcon, vol. 7(4), pages 1-11.
    • Handle: RePEc:ebl:ecbull:eb-03g00002
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    References listed on IDEAS

    as
    1. Suleyman Basak & Michael Gallmeyer, 1999. "Currency Prices, the Nominal Exchange Rate, and Security Prices in a Two‐Country Dynamic Monetary Equilibrium," Mathematical Finance, Wiley Blackwell, vol. 9(1), pages 1-30, January.
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    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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