Money Illusion and Coordination

Rati Mekvabishvili

MPRA Paper from University Library of Munich, Germany

Abstract: Non-neutrality of money and stickiness of prices puzzled the economist for decades. The phenomenon of money illusion is one of the central aspects with this regard. Money illusion refers to the tendency to confuse nominal and real aspects of the economy. Our experimental evidences show that even one money illusion prone agent can cause inefficient outcome. Interestingly, we find that under strategic setting money illusion prone subject learns from others behavior. However, the effect of learning under strategic setting seems to be a double-edged; while money illusion free subject learns fast by imitating others to how to overcome money illusion, at the same time her previous actions distorts the aggregate behavior. As it seems, this pattern is largely responsible for the observed stability around unstable equilibrium.

Keywords: Money Illusion; Experiment; coordination (search for similar items in EconPapers)
JEL-codes: E0 E02 E03 (search for similar items in EconPapers)
Date: 2006-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:93688

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