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American Economic Review: Vol. 91 No. 5 (December 2001)


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Does Money Illusion Matter?

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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


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.

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Fehr, Ernst (Institute for Empirical Research in Econ, U Zurich)
Tyran, Jean-Robert (U St Gallen)

JEL Classifications

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

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