Price Determinacy in Ricardian Worlds

Abstract

In this paper I analyze the problem of price determinacy in Ricardian economies. Contrary to Benassy (2005) I show that price determinacy in Ricardian economies is possible, even though no Pigou-effect exists. Under the assumptions of the endowment model of Benassy (2005), the central bank is able to set the sequence of money supplies such that desired inflation targets, simple interest rate targets and also more complex interest rate rules are realized and at the same time a well determined price level results. As the analysis shows, it is not a Pigou-effect that is working in a Ricardian economy but a transaction volume effect. This mechanisms works independent from the way how money is injected into the economy: either via buying goods on the goods market or as a credit supplied to the capital market.