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

Colin Rogers ()
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Colin Rogers: School of Economics, University of Adelaide

No 2008-02, School of Economics and Public Policy Working Papers from University of Adelaide, School of Economics and Public Policy

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.

Keywords: frictionless models; `monetary frictions'; nominal and numeraire prices; theories of the price level (search for similar items in EconPapers)
JEL-codes: B40 E40 E42 E50 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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