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Title:Money illusion and the long-run Phillips curve in staggered wage setting models PDF Logo
Authors:Vaona, Andrea
Issue Date:2011
Series/Report no.:Kiel Working Papers 1714
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 nonsuperneutralities 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 an appendix, we investigate how money illusion affects the short-run effects of a monetary shock.
Subjects:Phillips curve
inflation
nominal inertia
monetary policy
dynamic general equilibrium
money illusion
Stevens' ratio estimation function
JEL:E3
E20
E40
E50
Document Type:Working Paper
Appears in Collections:Kieler Arbeitspapiere, IfW
Publikationen von Forscherinnen und Forschern des IfW

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