Money illusion and the long-run Phillips curve in staggered wage setting models

Andrea Vaona

No 1714, Kiel Working Papers from Kiel Institute for the World Economy

Abstract: We consider the effect of money illusion - defined referring to Stevens' ratio estimation function - on the long-run Phillips curve in an otherwise standard New Keynesian model of sticky wages. We show that if households under-perceive real economic variables, negative money non-superneutralities will become more severe. On the contrary, if households over-perceive real variables, positive money nonsuperneutralities will arise. We also provide a welfare analysis of our results and we show that they are robust to the inclusion of varying capital into the model. Firms' (over-)under-perception of the real prices of production inputs strengthens) weakens negative money non-superneutralities. In an appendix, we investigate how money illusion affects the short-run effects of a monetary shock.

Keywords: Phillips curve; inflation; nominal inertia; monetary policy; dynamic general equilibrium; money illusion; Stevens' ratio estimation function (search for similar items in EconPapers)
JEL-codes: E20 E3 E40 E50 (search for similar items in EconPapers)
Date: 2011
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Related works:
Journal Article: Money illusion and the long-run Phillips curve in staggered wage-setting models (2013)
Working Paper: Money illusion and the long-run Phillips curve in staggered wage-setting models (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1714

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