181:. Actually, money illusion is not enough to explain the mechanism underlying this Phillips curve. It requires two additional assumptions. First, prices respond differently to modified demand conditions: an increased aggregate demand exerts its influence on commodity prices sooner than it does on labour market prices. Therefore, the drop in unemployment is, after all, the result of decreasing real wages and an accurate judgement of the situation by employees is the only reason for the return to an initial (natural) rate of unemployment (i.e. the end of the money illusion, when they finally recognize the actual dynamics of prices and wages). The other (arbitrary) assumption refers to a special informational asymmetry: whatever employees are unaware of in connection with the changes in (real and nominal) wages and prices can be clearly observed by employers. The new classical version of the Phillips curve was aimed at removing the puzzling additional presumptions, but its mechanism still requires money illusion.
193:
173:
theories such as the "expectations-augmented
Phillips curve". If workers use their nominal wage as a reference point when evaluating wage offers, firms can keep real wages relatively lower in a period of high inflation as workers accept the seemingly high nominal wage increase. These lower real wages
141:
Money illusion can also influence people's perceptions of outcomes. Experiments have shown that people generally perceive an approximate 2% cut in nominal income with no change in monetary value as unfair, but see a 2% rise in nominal income where there is 4% inflation as fair, despite them being
142:
almost rational equivalents. This result is consistent with the 'Myopic Loss
Aversion theory'. Furthermore, the money illusion means nominal changes in price can influence demand even if real prices have remained constant.
564:
553:
470:
134:
40:
623:
438:
165:
Some have suggested that money illusion implies that the negative relationship between inflation and unemployment described by the
154:. Nominal prices provide a convenient rule of thumb for determining value and real prices are only calculated if they seem highly
98:
for the existence of the effect and it has been shown to affect behaviour in a variety of experimental and real-world situations.
639:
Vol 87, No 2, Papers and
Proceedings of the Hundred and Fourth Annual Meeting of the American Economic Association (May, 1997)
562:
Weber, Bernd; Rangel, Antonio; Wibral, Matthias; Falk, Armin (2009), "The medial prefrontal cortex exhibits money illusion",
342:
47:(real value) at a previous point in time. Viewing purchasing power as measured by the nominal value is false, as modern
676:
681:
632:
216:
155:
262:
82:
economists who contend that people act rationally (i.e. think in real prices) with regard to their wealth.
494:
351:
226:
206:
113:
650:
573:
52:
356:
666:
340:
Benartzi, Shlomo; Thaler, Richard H. (1995). "Myopic Loss
Aversion and the Equity Premium Puzzle".
64:
646:
671:
533:
525:
412:
377:
369:
293:
285:
198:
105:
95:
101:
Shafir et al. also state that money illusion influences economic behaviour in three main ways:
619:
601:
549:
466:
434:
591:
581:
517:
509:
458:
404:
361:
323:
277:
87:
44:
221:
211:
577:
596:
178:
166:
159:
32:
660:
170:
109:
68:
56:
48:
537:
381:
133:
Social discourse, in formal media and more generally, reflects some confusion about
297:
91:
83:
43:
terms. In other words, the face value (nominal value) of money is mistaken for its
395:
Patinkin, Don (1969), "The
Chicago Tradition, The Quantity Theory, And Friedman",
177:
Money illusion is believed to be instrumental in the
Friedmanian version of the
521:
613:
490:
462:
457:. Contributions to Economics. Heidelberg/New York/Dordrecht/London: Springer.
188:
151:
117:
281:
150:
Explanations of money illusion generally describe the phenomenon in terms of
642:
586:
327:
123:
20:
605:
513:
130:
are not indexed to inflation as frequently as one would rationally expect.
79:
529:
416:
373:
289:
261:
Marianne
Bertran; Sendhil Mullainathan & Eldar Shafir (May 2004).
314:
Shafir, E.; Diamond, P. A.; Tversky, A. (1997), "On Money
Illusion",
174:
would allow firms to hire more workers in periods of high inflation.
408:
365:
51:
have no intrinsic value and their real value depends purely on the
36:
127:
455:
The Theory of New
Classical Macroeconomics. A Positive Critique
108:. Money illusion has been proposed as one reason why
548:, vol. 3, London: Macmillan, pp. 518–519,
612:Akerlof, George A.; Shiller, Robert J. (2009),
78:The existence of money illusion is disputed by
618:, Princeton University Press, pp. 41–50,
8:
633:"Irving Fisher: Modern Behavioral Economist"
546:The New Palgrave: A Dictionary of Economics
595:
585:
355:
309:
307:
263:"A behavioral-economics view of poverty"
71:wrote an important book on the subject,
649:, New Palgrave Dictionary of Economics
238:
544:Howitt, P. (1987), "money illusion",
7:
397:Journal of Money, Credit and Banking
169:might hold, contrary to more recent
67:in the early twentieth century, and
14:
191:
343:Quarterly Journal of Economics
316:Quarterly Journal of Economics
112:are slow to change even where
1:
495:"Does Money Illusion Matter?"
493:; Tyran, Jean-Robert (2001),
146:Explanations and implications
651:New Keynesian macroeconomics
637:The American Economic Review
433:, McGraw-Hill, p. 252,
270:The American Economic Review
162:or in long term contracts).
250:, New York: Adelphi Company
16:Cognitive bias in economics
698:
631:Thaler, Richard H.(1997)
463:10.1007/978-3-319-17578-2
120:to fall or costs to rise.
55:. The term was coined by
41:nominal, rather than real
502:American Economic Review
282:10.1257/0002828041302019
217:Framing (social science)
63:. It was popularized by
647:New Keynesian Economics
587:10.1073/pnas.0901490106
453:Galbács, Peter (2015).
431:Advanced macroeconomics
328:10.1162/003355397555208
246:Fisher, Irving (1928),
227:Map-territory relation
135:real and nominal value
94:(1997) have provided
61:Stabilizing the Dollar
514:10.1257/aer.91.5.1239
429:Romer, David (2006),
207:Behavioural economics
158:(e.g. in periods of
578:2009PNAS..106.5025W
522:20.500.11850/146556
65:John Maynard Keynes
677:Behavioral finance
248:The Money Illusion
199:Numismatics portal
96:empirical evidence
73:The Money Illusion
572:(13): 5025–5028,
555:978-0-333-37235-7
472:978-3-319-17578-2
39:is thought of in
689:
682:Cognitive biases
628:
608:
599:
589:
558:
540:
508:(5): 1239–1262,
499:
477:
476:
450:
444:
443:
426:
420:
419:
392:
386:
385:
359:
337:
331:
330:
311:
302:
301:
267:
258:
252:
251:
243:
201:
196:
195:
194:
106:Price stickiness
88:Peter A. Diamond
45:purchasing power
697:
696:
692:
691:
690:
688:
687:
686:
657:
656:
626:
611:
561:
556:
543:
497:
489:
486:
484:Further reading
481:
480:
473:
452:
451:
447:
441:
428:
427:
423:
409:10.2307/1991376
394:
393:
389:
366:10.2307/2118511
357:10.1.1.353.2566
339:
338:
334:
313:
312:
305:
265:
260:
259:
255:
245:
244:
240:
235:
222:Homo economicus
212:Fiscal Illusion
197:
192:
190:
187:
148:
49:fiat currencies
17:
12:
11:
5:
695:
693:
685:
684:
679:
674:
669:
659:
658:
655:
654:
640:
629:
624:
615:Animal Spirits
609:
559:
554:
541:
485:
482:
479:
478:
471:
445:
439:
421:
387:
332:
322:(2): 341–374,
303:
276:(2): 419–423.
253:
237:
236:
234:
231:
230:
229:
224:
219:
214:
209:
203:
202:
186:
183:
179:Phillips curve
167:Phillips curve
160:hyperinflation
147:
144:
139:
138:
131:
121:
110:nominal prices
33:cognitive bias
29:price illusion
25:money illusion
15:
13:
10:
9:
6:
4:
3:
2:
694:
683:
680:
678:
675:
673:
670:
668:
665:
664:
662:
652:
648:
644:
641:
638:
634:
630:
627:
625:9780691142333
621:
617:
616:
610:
607:
603:
598:
593:
588:
583:
579:
575:
571:
567:
566:
560:
557:
551:
547:
542:
539:
535:
531:
527:
523:
519:
515:
511:
507:
503:
496:
492:
488:
487:
483:
474:
468:
464:
460:
456:
449:
446:
442:
440:9780072877304
436:
432:
425:
422:
418:
414:
410:
406:
402:
398:
391:
388:
383:
379:
375:
371:
367:
363:
358:
353:
349:
345:
344:
336:
333:
329:
325:
321:
317:
310:
308:
304:
299:
295:
291:
287:
283:
279:
275:
271:
264:
257:
254:
249:
242:
239:
232:
228:
225:
223:
220:
218:
215:
213:
210:
208:
205:
204:
200:
189:
184:
182:
180:
175:
172:
171:macroeconomic
168:
163:
161:
157:
153:
145:
143:
136:
132:
129:
125:
122:
119:
115:
111:
107:
104:
103:
102:
99:
97:
93:
89:
85:
81:
76:
74:
70:
69:Irving Fisher
66:
62:
58:
57:Irving Fisher
54:
50:
46:
42:
38:
34:
30:
26:
22:
636:
614:
569:
563:
545:
505:
501:
454:
448:
430:
424:
403:(1): 46–70,
400:
396:
390:
350:(1): 73–92.
347:
341:
335:
319:
315:
273:
269:
256:
247:
241:
176:
164:
149:
140:
100:
92:Amos Tversky
84:Eldar Shafir
77:
72:
60:
28:
24:
18:
491:Fehr, Ernst
118:real prices
116:has caused
75:, in 1928.
53:price level
667:Heuristics
661:Categories
233:References
152:heuristics
672:Inflation
643:Huw Dixon
352:CiteSeerX
124:Contracts
114:inflation
21:economics
645:(2008),
606:19307555
538:15342301
382:55030273
185:See also
80:monetary
597:2664018
574:Bibcode
530:2677924
417:1991376
374:2118511
298:2865749
290:3592921
156:salient
31:, is a
622:
604:
594:
552:
536:
528:
469:
437:
415:
380:
372:
354:
296:
288:
90:, and
35:where
534:S2CID
526:JSTOR
498:(PDF)
413:JSTOR
378:S2CID
370:JSTOR
294:S2CID
286:JSTOR
266:(PDF)
37:money
27:, or
620:ISBN
602:PMID
565:PNAS
550:ISBN
467:ISBN
435:ISBN
128:laws
126:and
635:in
592:PMC
582:doi
570:106
518:hdl
510:doi
459:doi
405:doi
362:doi
348:110
324:doi
320:112
278:doi
59:in
19:In
663::
600:,
590:,
580:,
568:,
532:,
524:,
516:,
506:91
504:,
500:,
465:.
411:,
399:,
376:.
368:.
360:.
346:.
318:,
306:^
292:.
284:.
274:94
272:.
268:.
86:,
23:,
653:.
584::
576::
520::
512::
475:.
461::
407::
401:1
384:.
364::
326::
300:.
280::
137:.
Text is available under the Creative Commons Attribution-ShareAlike License. Additional terms may apply.