Sunday, October 1, 2017

Brian Romanchuk — The Price Level Does Not Exist

It appears to be a mistake to refer to the price level when discussing the theoretical properties of an economy; at best, there are a few price levels in play at a given time. If we are referring to the measured level of a price index, such as the Consumer Price Index (CPI) there is no difficulty, however this aggregate price index should not be expected to correspond to any useful theoretical construct. This article explains my logic, and then looks at the practical implications of what appears to be yet another hand-wringing post-Keynesian article about the difficulties with mathematical economics..
As a disclaimer, I have no idea how my comments fit in with the existing academic literature. I had a very brief discussion with Professor Randall Wray at the Modern Monetary Theory Conference on this topic, and it was an issue that he was well aware of. I would guess that it would cause greater anguish among mainstream economists, as it suggests that their preferred policy of inflation targeting is theoretically incoherent...
Refreshing to get some applied mathematicians involved.

Bond Economics
The Price Level Does Not Exist
Brian Romanchuk

2 comments:

Neil Wilson said...

An excellent piece by Brian. Definitely recommended.

Matt Franko said...

Well if there was one bank, and they were running at a set point on their leverage ratio of 0.1, and they had $1M in capital, if somebody went to them to finance a building they had built, the price would be 0.1 = ($1M/P)

Solve for P to get the price...