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Do Frictionless Models of Money and the Price Level Make Sense?

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  • Colin Rogers

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    (School of Economics, University of Adelaide)

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    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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    File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2008-02.pdf
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    Bibliographic Info

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

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    Length: 36 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:adl:wpaper:2008-02

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    Keywords: frictionless models; `monetary frictions'; nominal and numeraire prices; theories of the price level;

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