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Do Frictionless Models of Money and the Price level Make sense?

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Author Info
Colin Rogers () (School of Economics, University of Adelaide)
Abstract

No. As well-specified Walrasian general equilibrium systems, frictionless models are isomorphic with the Arrow-Debreu (A-D) world. It is well known that the A-D world has no role for money, credit or banks. Grafting a role for money onto a frictionless model by appending a quantity equation or cash-in-advance constraint makes the error of converting money into a friction. Furthermore, as frictionless models have no use for money or nominal values it makes no sense to use them to adjudicate between theories of the price level or to claim that they provide the theoretical foundations for monetary policy.

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Paper provided by University of Adelaide, School of Economics in its series Working Papers with number 2008-02.

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Date of creation: Sep 2008
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Handle: RePEc:adl:wpaper:2008-02

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Related research
Keywords: Frictionless models; `monetary frictions'; nominal and numeraire prices; theories of the price level.;

Find related papers by JEL classification:
B40 - Schools of Economic Thought and Methodology - - Economic Methodology - - - General
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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References listed on IDEAS
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  3. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-31, November.
    Other versions:
  4. Charles A. E. Goodhart, 2005. "What Can Academics Contribute to the Study of Financial Stability?," The Economic and Social Review, Economic and Social Studies, vol. 36(3), pages 189-203. [Downloadable!]
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    Other versions:
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  8. Willem H. Buiter, 2005. "New Developments in Monetary Economics: Two ghosts, Two Eccentricities, a Fallacy, a Mirage and a Mythos," Economic Journal, Royal Economic Society, vol. 115(502), pages C1-C31, 03. [Downloadable!] (restricted)
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  10. Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, vol. 112(481), pages 459-480, July. [Downloadable!] (restricted)
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  12. Bennett T. McCallum, 2003. "Is the Fiscal Theory of the Price Level Learnable?," NBER Working Papers 9961, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
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  15. Lucas, Robert E., 1984. "Money in a theory of finance," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 9-46, January. [Downloadable!] (restricted)
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