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Economists long considered money illusion to be largely irrelevant. Here we show, however, that money illusion has powerful effects on equilibrium selection. If we represent pay-offs in nominal terms, choices converge to the Pareto inefficient equilibrium; however, if we lift the veil of money...
Persistent link: https://www.econbiz.de/10005791766
A reduction in inflation can fuel run-ups in housing prices if people suffer from money illusion. For example … account that inflation lowers future real mortgage costs. We decompose the price-rent ratio in a rational component — meant to … capture the proxy effect and risk premia — and an implied mispricing. We find that inflation and nominal interest rates …
Persistent link: https://www.econbiz.de/10005067397
inflation, the real short rate is negatively correlated with realized inflation, and money illusion may induce predictability …
Persistent link: https://www.econbiz.de/10005048554
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...
Persistent link: https://www.econbiz.de/10005504787
Loss aversion is one of the most robust findings to have emerged from behavioral economics. Surprisingly little attention, however, has been devoted to nominal loss aversion, the interaction of loss aversion and money illusion. People tend to think of transactions in terms of their nominal...
Persistent link: https://www.econbiz.de/10011083826
episode price-setting firms' expect inflation to be highly persistent and opt for backward-looking indexation. As the central … that choose the rate for indexation also re-assess the likelihood that announced inflation targets determine steady …-state inflation and adjust indexation of contracts accordingly. A strategy of announcing and pursuing short-term targets for inflation …
Persistent link: https://www.econbiz.de/10005114241
We study the determination of Irish inflation between 1926 and 2012. The difference between unemployment and the NAIRU … is a significant determinant of inflation in a simple backward-looking Phillips Curve that incorporates import prices …
Persistent link: https://www.econbiz.de/10011272719
This paper presents a theory of the monetary transmission mechanism in a monetary version of Farmer’s (2009) model in …
Persistent link: https://www.econbiz.de/10008692320
regimes that are nested within this framework: inflation, output-gap growth and nominal income growth targeting; and inflation …
Persistent link: https://www.econbiz.de/10008459765
We use evidence from the term structure of inflation expectations implicit in the nominal yields and survey forecasts … of inflation to address the question of whether or not monetary policy is effective. We construct a model that …-neutral, subjective, and objective probability measures. We extract private sector expectations of inflation from this model and establish …
Persistent link: https://www.econbiz.de/10005662095