Preferences for fair prices, cursed inferences, and the nonneutrality of money

Erik Eyster, Kristóf Madarász and Pascal Michaillat

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper explains the nonneutrality of money from two assumptions: (1) consumers dislike paying prices that exceed some fair markup on firms’ marginal costs; and (2) consumers under infer marginal costs from available information. After an increase in money supply, consumers underappreciate the increase in nominal marginal costs and hence partially misattribute higher prices to higher markups; they perceive transactions as less fair, which increases the price elasticity of their demand for goods; firms respond by reducing markups; in equilibrium, output increases. By raising perceived markups, increased money supply inflicts a psychological cost on consumers that can offset the benefit of increased output.

Keywords: nonneutrality of money; fairness; cursedness; markups (search for similar items in EconPapers)
JEL-codes: E10 E3 E31 E40 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2015-02
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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http://eprints.lse.ac.uk/60845/ Open access version. (application/pdf)

Related works:
Working Paper: Preferences for Fair Prices, Cursed Inferences, and the Nonneutrality of Money (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:60845

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