Does Money Illusion Matter?: Comment

Petersen, Luba; Winn, Abel

doi:10.1257/aer.104.3.1047

Cited by 30 publications

(7 citation statements)

References 11 publications

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“…In contrast, our data source contains many donations made via bank transfers or even automatically converted standing orders, which would reduce the effect of money illusion considerably. This is in line with recent laboratory results (Petersen and Winn 2014). Changing the experimental framework of Fehr and Tyran (2001), for instance by providing a computerized income converter, they find money illusion to be less prevalent than in the initial design of Fehr and Tyran.…”

Section: Incorporating Data Non-linearitysupporting

confidence: 86%

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Did the Introduction of the Euro Lead to Money Illusion? Empirical Evidence from Germany

Bittschi

Duppel

2015

SSRN Journal

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. AbstractUsing the introduction of the euro as a natural experiment, we provide economywide evidence for money illusion based on declared donations from German administrative income tax data. Our results suggest a magnitude of the money illusion effect between 2.4% and 7.6%. Compared to previous studies on money illusion in the course of the euro currency changeover this effect size is significantly lower. We trace this back to the more comprehensive donation data in our study compared to hitherto studied face-to-face collections, which makes our results less prone to "power of the ask" and social pressure effects.

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Section: Incorporating Data Non-linearitysupporting

confidence: 86%

“…Moreover, outcomes of money illusion in laboratory frameworks depend heavily on the experimental design (Petersen and Winn 2014).…”

Section: Background and Literaturementioning

confidence: 99%

Did the Introduction of the Euro Lead to Money Illusion? Empirical Evidence from Germany

Bittschi

Duppel

2015

SSRN Journal

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“…Specifically, they report that prices exhibit nominal inertia after a deflationary shock. Petersen and Winn (2014) argue that the nominal inertia observed by Fehr and Tyran (2001) is mainly due to the adaptive nature of firms' best responses rather than money illusion per se, but Fehr and Tyran (2014) argue that this is too narrow an interpretation. By contrast, in this article we provide a test of the neutrality-of-money proposition in a more explicit, exchangeoriented setting, where agents must bargain over quantities and prices.…”

Section: Related Literaturementioning

confidence: 99%

Experimental Evidence on the Essentiality and Neutrality of Money in a Search Model

Duffy¹,

Puzzello²

2014

Research in Experimental Economics

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We study a microfounded search model of exchange in the laboratory. Using a within-subjects design, we consider exchange behavior with and without an intrinsically worthless token object. While these tokens have no redemption value, like fiat money they may foster greater exchange and welfare via the coordinating role of having prices of goods in terms of tokens. We find that welfare is indeed improved by the presence of tokens provided that the economy starts out with a supply of such tokens. In economies that operate for some time without tokens, the later surprise introduction of tokens does not serve to improve welfare. We also explore the impact of announced changes in the economy-wide stock of tokens (fiat money) on prices. Consistent with the quantity theory of money, we find that increases in the stock of money (tokens) have no real effects and mainly result in proportionate changes to prices.

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“…This approach of stabilization has also been employed by Fehr and Tyran (2001), Davis andKorenok 2011, andPetersen andWinn (2014) to explore the effects of money supply shocks on price adjustment in partial equilibrium frameworks. This feature is absent in the experimental general equilibrium literature, where shocks occur either between treatments (Lian and Plott, 1998) or continuously within a treatment without any opportunity for stabilization (Bosch-Domenech and Silvestre, 1997;Noussair et al, 2011)[4].…”

Section: Householdsmentioning

confidence: 99%

Do expectations and decisions respond to monetary policy?

Petersen

2015

Journal of Economic Studies

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Purpose -The purpose of this paper is to explore the ability of monetary policy to generate real effects in laboratory general equilibrium production economies. Design/methodology/approach -To understand why monetary policy is not consistently effective at stabilizing economic activity, the author vary the types of agents interacting in the economy and consider treatments where subjects are playing the role of households (firms) in an economy where automated firms (households) are programmed to behave rationally. Findings -While the majority of participants' expectations respond to monetary policy in the direction intended, subjects do form expectations adaptively, relying heavily on past variables and forecasts in forming two-steps-ahead forecasts. Moreover, in the presence of counterparts that are boundedly rational, forecast accuracy worsens significantly. When interacting with automated households, updating firms' prices respond modestly to monetary policy and significantly to anticipated marginal costs and future prices. The greatest deviations in behavior from theoretical predictions arise from human households (HH). Households persistent oversupply of labor and under-consumption is attributed to precautionary saving and debt aversion. The results provide evidence that the effects of monetary policy on decision making hinge on the distribution of indebtedness of households. Originality/value -The author present causal evidence of the effects of potential bounded rationality on agents' consumption and labor decisions.

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Does Money Illusion Matter?: Comment

Cited by 30 publications

References 11 publications

Did the Introduction of the Euro Lead to Money Illusion? Empirical Evidence from Germany

Did the Introduction of the Euro Lead to Money Illusion? Empirical Evidence from Germany

Experimental Evidence on the Essentiality and Neutrality of Money in a Search Model

Do expectations and decisions respond to monetary policy?

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