American Economic Review Vol. 104 No. 3 2014

Does Money Illusion Matter?: Comment

Luba Petersen¹; Abel Winn²

¹ Department of Economics, Simon Fraser University, 8888 University Dr., WMC 3629, Burnaby, British Columbia V5A 1S6 (e-mail: ) · ² Argyros School of Business and Economics, Chapman University, One University Dr., Orange, CA 92866 (e-mail: )

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.

DOI

10.1257/aer.104.3.1047

Volume

104

Issue

3

Pages

1047-1062

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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