Loss Aversion and the Non-Neutrality of Money

Ian McDonald () and Hugh Sibly

No 590, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: We consider whether the introduction of the psychological concept of loss aversion into agents' preferences could generate a macroeconomic model in which changes in the money supply can have real, persistent effects. It is demonstrated that the macroeconomic implications of loss aversion depend on the specification of the reference wage. We consider two plausible specifications: one in which the reference wage is the average wage and the other in which a worker's reference wage is the wage she was paid in the previous period.

Keywords: MONEY; NEUTRALITY; WAGES; MODELS (search for similar items in EconPapers)
JEL-codes: C51 E44 (search for similar items in EconPapers)
Pages: 26 pages
Date: 1997
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:590

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