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  3. American Economic Review
  4. December 2001
  5. Does Money Illusion Matter?

Does Money Illusion Matter?

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Abstract

This paper shows that a small amount of individual-level money illusion may cause considerable aggregate nominal inertia after a negative nominal shock. In addition, our results indicate that negative and positive nominal shocks have asymmetric effects because of money illusion. While nominal inertia is quite substantial and long lasting after a negative shock, it is rather small after a positive shock.

Citation

Fehr, Ernst, and Jean-Robert Tyran. 2001. "Does Money Illusion Matter?" American Economic Review, 91 (5): 1239-1262. DOI: 10.1257/aer.91.5.1239

JEL Classification

  • E31 Price Level; Inflation; Deflation
  • E52 Monetary Policy
  • E32 Business Fluctuations; Cycles
  • E51 Money Supply; Credit; Money Multipliers