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...

While the debate on how economic agents form expectations and how these expectationsshould be modelled has been key to modern macroeconomics, money illusion has been ananathema to macroeconomists until recently. The rational expectations revolution in the1970's thoroughly banned the study of...

For decades economists have considered money illusion aslargely irrelevant. Here we show, however, that money illusion haspowerful effects on equilibrium selection. If we represent payoffs innominal terms almost all subjects play at or close to an inefficientequilibrium whereas if we lift the...