Expectations and the Effects of Money Illusion

Ernst Fehr and Jean-Robert Tyran

Chapter 8 in Psychology, Rationality and Economic Behaviour, 2005, pp 155-180 from Palgrave Macmillan

Abstract: Abstract While the debate on how economic agents form expectations and how these expectations should be modelled has been key to modern macroeconomics, money illusion has been an anathema to macroeconomists until recently. The rational expectations revolution in the 1970s thoroughly banned the study of money illusion from economists’ research agendas. Rational individuals do not exhibit illusions and because, by assumption, people behave rationally, there is nothing to study. Money illusion was a concept to be mentioned in courses on the history of economic thought but not a part of actual research endeavours. In fact, a reliable method for getting leading journals to reject theory papers was to propagate that money illusion affected individual behaviour.

Keywords: Rational Expectation; Average Price; Price Expectation; Monetary Shock; Strategic Substitute (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:pal:intecp:978-0-230-52234-3_8

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DOI: 10.1057/9780230522343_8

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