Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/21016
Authors: 
Fehr, Ernst
Tyran, Jean-Robert
Year of Publication: 
2000
Series/Report no.: 
IZA Discussion paper series 174
Abstract: 
Money illusion means that people behave differently when the same objective situation is represented in nominal terms rather than in real terms. This paper shows that seemingly innocuous differences in payoff representation cause pronounced differences in nominal price inertia indicating the behavioral importance of money illusion. In particular, if the payoff information is presented to subjects in nominal terms, price expectations and actual price choices after a fully anticipated negative nominal shock are much stickier than when payoff information is presented in real terms. In addition we show that money illusion causes asymmetric effects of negative and positive nominal shocks. While nominal inertia is quite substantial and long-lasting after a negative shock, it is rather small after a positive shock.
Subjects: 
Money illusion
nominal inertia
sticky prices
non-neutrality of money
JEL: 
E32
E52
C92
Document Type: 
Working Paper

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