I'm currently converting an old winforms app into a wpf mvvm application, and I'm just providing a property on my viewmodel that points to the actual instance of the model.
From my point of view, it doesn't make sense to create a replica of the model in the viewmodel, and I don't think that the MVVM community is saying that anyway.
It particularly won't make sense when you start using entity framework or some other database orm, because entity framework has properties that support databinding out of the box. Plus, when you start making changes to the database, you have to update the model, and the viewmodel.
Edit: You're right in that ef doesn't support INotifyCollectionChanged, but as far as I know, it does support INotifyPropertyChanged, and from the looks of it, Microsoft is thinking of implementing INotifyCollectionChanged in a future release.
I don't think that there is a right or wrong way for MVVM - I think that every different 'authority' on the web has their own interpretation of how it should work.