Does Money Illusion Matter? Comment

Luba Petersen and Abel Winn

American Economic Review, 2014, vol. 104, issue 3, 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.

JEL-codes: C91 D21 D83 E31 E41 E52 L11 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/aer.104.3.1047
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Citations: View citations in EconPapers (22)

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