IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v104y2014i3p1047-62.html
   My bibliography  Save this article

Does Money Illusion Matter? Comment*

* This paper is a replication of an original study

Author

Listed:
  • Luba Petersen
  • Abel Winn

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.

Suggested Citation

  • Luba Petersen & Abel Winn, 2014. "Does Money Illusion Matter? Comment," American Economic Review, American Economic Association, vol. 104(3), pages 1047-1062, March.
    • Handle: RePEc:aea:aecrev:v:104:y:2014:i:3:p:1047-62
    Note: DOI: 10.1257/aer.104.3.1047
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.104.3.1047
    Download Restriction: no
    File URL: http://www.aeaweb.org/aer/app/10403/20110570_app.pdf
    Download Restriction: no
    File URL: http://www.aeaweb.org/aer/data/10403/20110570_data.zip
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Karl H.Schlag, 2015. "Who gives Direction to Statistical Testing? Best Practice meets Mathematically Correct Tests," Vienna Economics Papers vie1512, University of Vienna, Department of Economics.
    2. Ciril Bosch-Rosa & Thomas Meissner & Antoni Bosch-Domènech, 2018. "Cognitive bubbles," Experimental Economics, Springer;Economic Science Association, vol. 21(1), pages 132-153, March.
    3. Andreas C. Drichoutis & Jayson L. Lusk & Rodolfo M. Nayga, 2015. "The veil of experimental currency units in second price auctions," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 1(2), pages 182-196, December.
    4. Camille Cornand & Frank Heinemann, 2014. "Experiments on Monetary Policy and Central Banking," Research in Experimental Economics, in: Experiments in Macroeconomics, volume 17, pages 167-227, Emerald Group Publishing Limited.
    5. Camille Cornand & Frank Heinemann, 2015. "Macro-expérimentation autour des fonctions des banques centrales," Revue française d'économie, Presses de Sciences-Po, vol. 0(2), pages 3-47.
    6. Bulutay, Muhammed & Cornand, Camille & Zylbersztejn, Adam, 2022. "Learning to deal with repeated shocks under strategic complementarity: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1318-1343.
    7. Cooper, Kristen & Schneider, Henry & Waldman, Michael, 2021. "Limited rationality and the strategic environment: Further evidence from a pricing game," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 90(C).
    8. Ciril Bosch-Rosa & Thomas Meissner, 2020. "The one player guessing game: a diagnosis on the relationship between equilibrium play, beliefs, and best responses," Experimental Economics, Springer;Economic Science Association, vol. 23(4), pages 1129-1147, December.
    9. Grundmann, Susanna & Giamattei, Marcus & Lambsdorff, Johann Graf, 2019. "Intentions rather than money illusion – Why nominal changes induce real effects," European Economic Review, Elsevier, vol. 119(C), pages 166-178.
    10. Luhan, Wolfgang J. & Scharler, Johann, 2014. "Inflation illusion and the Taylor principle: An experimental study," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 94-110.
    11. Cooper, Kristen B. & Schneider, Henry S. & Waldman, Michael, 2017. "Limited rationality and the strategic environment: Further theory and experimental evidence," Games and Economic Behavior, Elsevier, vol. 106(C), pages 188-208.
    12. Karl H.Schlag, 2015. "Who gives Direction to Statistical Testing? Best Practice meets Mathematically Correct Tests," Vienna Economics Papers 1512, University of Vienna, Department of Economics.
    13. March, Christoph, 2021. "Strategic interactions between humans and artificial intelligence: Lessons from experiments with computer players," Journal of Economic Psychology, Elsevier, vol. 87(C).
    14. Miller, Logan & Rholes, Ryan, 2023. "Joint vs. Individual performance in a dynamic choice problem," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 897-934.
    15. Bittschi, Benjamin & Duppel, Saskia, 2015. "Did the introduction of the euro lead to money illusion? Empirical evidence from Germany," ZEW Discussion Papers 15-058, ZEW - Leibniz Centre for European Economic Research.

    Replication

    This item is a replication of:
  • Ernst Fehr & Jean-Robert Tyran, 2001. "Does Money Illusion Matter?," American Economic Review, American Economic Association, vol. 91(5), pages 1239-1262, December.

    • More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Does Money Illusion Matter? Comment (AER 2014) in ReplicationWiki

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:104:y:2014:i:3:p:1047-62. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.