 Does Money Illusion Matter?Ernst Fehr and Jean-Robert Tyran No 12, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich Abstract: Money illusion means that people behave differently when the same objective situation is represented in nominal or in real terms. To examine the behavioral impact of money illusion we studied the adjustment process of nominal prices after a fully anticipated negative nominal shock in an experimental setting with strategic complementarity. We show that seemingly innocuous differences in payoff presentation cause large behavioral differences. In particular, if the payoff information is presented to subjects in nominal terms, price stickiness and real effects are much more pronounced than when payoff information is presented in real terms. The driving force of differences in real outcomes is subjects� expectation of higher nominal inertia in the nominal payoff condition. Due to strategic complementarity, these expectations induce subjects to adjust rather slowly to the shock. Keywords: : Money illusion; nominal inertia; sticky prices; non-neutrality of money (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:zur:iewwpx:012 Access Statistics for this paper More papers in IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich |
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