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

Andrea Vaona

Research in Economics, 2013, vol. 67, issue 1, 88-99

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 non-superneutralities 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 the 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)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1090944312000427
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:67:y:2013:i:1:p:88-99

DOI: 10.1016/j.rie.2012.09.003

Access Statistics for this article

Research in Economics is currently edited by Federico Etro

More articles in Research in Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().