Does Money Illusion Matter? Comment
- (pp. 1047-62)
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.Citation
Petersen, Luba, and Abel Winn. 2014. "Does Money Illusion Matter? Comment." American Economic Review, 104 (3): 1047-62. DOI: 10.1257/aer.104.3.1047Additional Materials
JEL Classification
- 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