Money illusion of interest rates and household decision-making

Takeshi Niizeki ()
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Takeshi Niizeki: Chiba University

Economics Bulletin, 2025, vol. 45, issue 1, 111 - 117

Abstract: This paper examines whether Japanese households take the Fisher equation into account when making decisions about saving, borrowing, and spending. To this end, we conduct two experiments in which hypothetical scenarios are randomly assigned. The estimation results show that households generally make decisions without taking the Fisher equation into account. In other words, many decisions are made based on nominal rather than real interest rates. In addition, we find no evidence that the more educated are less likely to suffer from money illusion. These results have important implications for the effectiveness of unconventional monetary policy.

Keywords: Fisher equation; money illusion; unconventional monetary policy; household behavior (search for similar items in EconPapers)
JEL-codes: E2 E4 (search for similar items in EconPapers)
Date: 2025-03-30
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