Economic growth under money illusion

Jianjun Miao and Danyang Xie

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 1, 84-103

Abstract: Empirical and experimental evidence documents that money illusion is persistent and widespread. This paper incorporates money illusion into a stochastic continuous-time monetary model of endogenous growth. We model an agent's money illusion behavior by assuming that he maximizes nonstandard utility derived from both nominal and real quantities. Money illusion affects an agent's perception of the growth and riskiness of real wealth and distorts his consumption/savings decisions. It influences long-run growth via this channel. We show that the welfare cost of money illusion is negligible, whereas its impact on long-run growth is noticeable even if the degree of money illusion is low.

Keywords: Money illusion; Inflation; Growth; Welfare cost; Behavioral macroeconomics (search for similar items in EconPapers)
JEL-codes: D92 E21 E31 E52 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:1:p:84-103

DOI: 10.1016/j.jedc.2012.06.012

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