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

Author

Listed:
  • 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.

Suggested Citation

  • Colin Rogers, 2008. "Do Frictionless Models of Money and the Price Level Make Sense?," School of Economics and Public Policy Working Papers 2008-02, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2008-02
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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2008-02.pdf
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    Keywords

    frictionless models; `monetary frictions'; nominal and numeraire prices; theories of the price level;
    All these keywords.

    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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