Indeterminacy of equilibrium price of money, market price of risk and interest rates

This paper shows that a market price of nominal risk plays an important role in the determinacy of the price of money under a stochastic continuous−time monetary economy. It is presented that a sufficient condition for the determinacy of the price of money is either an exogenously given nominal short rate or an exogenously given market price of nominal risk, which implies that a different market price of nominal risk may yield a different price of money. Thus the nominal pricing kernel is not endogenously determined under the original assumptions of the model. If central banks can determine not only the money supply but also the nominal short rate process, the policy leads to the determinacy of a process of the price of money and the pricing kernels. Explicit solutions for real quantities and nominal quantities are provided for two cases of utility functional forms. Citation: Tanaka, Keiichi, (2003) "Indeterminacy of equilibrium price of money, market price of risk and interest rates." Economics Bulletin, Vol. 7, No. 4 pp. 1−11 Submitted: April 13, 2003. Accepted: May 28, 2003. URL: http://www.economicsbulletin.com/2003/volume7/EB−03G00002A.pdf