Do Frictionless Models of Money and the Price Level Make Sense?
AbstractNo. 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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Bibliographic InfoPaper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2008-02.
Length: 36 pages
Date of creation: 2008
Date of revision:
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
This paper has been announced in the following NEP Reports:
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- NEP-CBA-2008-09-20 (Central Banking)
- NEP-DGE-2008-09-20 (Dynamic General Equilibrium)
- NEP-MAC-2008-09-20 (Macroeconomics)
- NEP-MON-2008-09-20 (Monetary Economics)
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