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American Economic Review: Vol. 104 No. 3 (March 2014)

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Does Money Illusion Matter? Comment

Article Citation

Petersen, Luba, and Abel Winn. 2014. "Does Money Illusion Matter? Comment." American Economic Review, 104(3): 1047-62.

DOI: 10.1257/aer.104.3.1047

Abstract

This paper experimentally investigates whether money illusion generates substantial nominal inertia. Building on the design of Fehr and Tyran (2001), we find no evidence that agents choose high nominal payoffs over high real payoffs. However, participants do select prices associated with high nominal payoffs within a set of maximum real payoffs as a heuristic to simplify their decision task. The cognitive challenge of this task explains the majority of the magnitude of nominal inertia; money illusion exerts only a second-order effect. The duration of nominal inertia depends primarily on participants' best response functions, not the prevalence of money illusion.

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Online Appendix (1.22 MB) | Download Data Set (891.41 KB)

Authors

Petersen, Luba (Simon Fraser U)
Winn, Abel (Chapman U)

JEL Classifications

C91: Design of Experiments: Laboratory, Individual
D21: Firm Behavior: Theory
D83: Search; Learning; Information and Knowledge; Communication; Belief
E31: Price Level; Inflation; Deflation
E41: Demand for Money
E52: Monetary Policy
L11: Production, Pricing, and Market Structure; Size Distribution of Firms


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