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- Title
Does Money Illusion Matter?: Comment<sup>†</sup>.
- Abstract
This paper experimentally investigates whether money illusion generates substantial nominal inertia. Building on the design of Fehr and Tyran (2001), we find no evidence that agents choose high nominal payoffs over high real payoffs. However, participants do select prices associated with high nominal payoffs within a set of maximum real payoffs as a heuristic to simplify their decision task. The cognitive challenge of this task explains the majority of the magnitude of nominal inertia; money illusion exerts only a second-order effect. The duration of nominal inertia depends primarily on participants' best response functions, not the prevalence of money illusion. (JEL C91, D21, D83, E31, E41, E52, L11)
- Subjects
MONEY illusion; FEHR, Ernst; TYRAN, Jean-Robert; ECONOMICS &; psychology; NOMINAL measurement; NASH equilibrium
- Publication
American Economic Review, 2014, Vol 104, Issue 3, p1047
- ISSN
0002-8282
- Publication type
Article
- DOI
10.1257/aer.104.3.1047