TAILIEUCHUNG - Central Bank Interest-Rate Control in a Cashless, Arrow-Debreu economy: a comment on Wallace

Answering the question of why Brazil has relatively high real interest rates cannot be done in isolation by focusing exclusively on Brazilian data. Doing so would lead us to conclude that Brazilian real interest rates are actually very low at the moment. We are interested not only in why interest rates have declined but why, at any point in time, they were considerably higher than in other countries and what factors may help Brazil converge to the level of other emerging markets. To this end, the analysis in this paper is based on a panel data set of 15 emerging. | THE UNIVERSITY OF ADELAIDE AUSTRALIA The University of Adelaide School of Economics Research Paper No. 2006-04 Central Bank Interest-Rate Control in a Cashless Arrow-Debreu economy A Comment on Wallace Colin Rogers Central Bank Interest-Rate Control in a Cashless Arrow-Debreu economy a comment on Wallace Colin Rogers School of Economics University of Adelaide Abstract Wallace attempts to analyse central bank interest rate control in a cashless Arrow-Debreu economy. The model incorporates only the unit of account function of money and exhibits a version of the classical dichotomy in which arbitrary accounting prices are independent of the equilibrium real relative price vector. A model with these properties is incapable of providing a theory of the price level or inflation nominal interest rate rules or justifying a role for the central bank. Nominal magnitudes are nominal in name only and Wallace s analysis is without theoretical foundations. It generates a series of conceptual and logical puzzles. First Draft Feb 2005. Revised January 2006. JEL classification Keywords Cashless Arrow-Debreu Economy Accounting prices. 1 Central Bank Interest-Rate Control in a Cashless Arrow-Debreu economy a comment on Wallace Colin Rogers School of Economics University of Adelaide I Introduction In a recent paper Wallace 2004 uses a version of an Arrow-Debreu model to assess the role of a central bank in setting nominal interest rates to stabilise the price level. Wallace is of the opinion that the Arrow-Debreu model is the developed part of economic theory while monetary theory is underdeveloped. Wallace s intention is to bring rigour to monetary economics. In this note I point out the conceptual confusions that arise from proceeding as Wallace suggests. The source of these confusions has been well documented in the literature beginning with Hahn 1973a b 1980 but that has done little to prevent the perpetuation of these counter intuitive results and .

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