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


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Does Money Illusion Matter? Reply

Article Citation

Fehr, Ernst, and Jean-Robert Tyran. 2014. "Does Money Illusion Matter? Reply." American Economic Review, 104(3): 1063-71.

DOI: 10.1257/aer.104.3.1063


The data in Fehr and Tyran (FT, 2001) and Luba Petersen and Abel Winn (PW,2013) show that money illusion plays an important role in nominal price adjustment after a fully anticipated negative monetary shock. Money Illusion affects subjects' expectations, and causes pronounced nominal inertia after a negative shock but much less inertia after a positive shock. Thus PW provide a misleading interpretation both of our and their own data.

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Fehr, Ernst (U Zurich)
Tyran, Jean-Robert (U Vienna and U Copenhagen)

JEL Classifications

C92: Design of Experiments: Laboratory, Group Behavior
D83: Search; Learning; Information and Knowledge; Communication; Belief
D84: Expectations; Speculations
E31: Price Level; Inflation; Deflation
E32: Business Fluctuations; Cycles
E52: Monetary Policy

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