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Expectations and the Effects of Money Illusion

In: Psychology, Rationality and Economic Behaviour

Author

Listed:
  • Ernst Fehr

    (University of Zurich)

  • Jean-Robert Tyran

    (University of Copenhagen)

Abstract

While the debate on how economic agents form expectations and how these expectations should be modelled has been key to modern macroeconomics, money illusion has been an anathema to macroeconomists until recently. The rational expectations revolution in the 1970s thoroughly banned the study of money illusion from economists’ research agendas. Rational individuals do not exhibit illusions and because, by assumption, people behave rationally, there is nothing to study. Money illusion was a concept to be mentioned in courses on the history of economic thought but not a part of actual research endeavours. In fact, a reliable method for getting leading journals to reject theory papers was to propagate that money illusion affected individual behaviour.

Suggested Citation

  • Ernst Fehr & Jean-Robert Tyran, 2005. "Expectations and the Effects of Money Illusion," International Economic Association Series, in: Bina Agarwal & Alessandro Vercelli (ed.), Psychology, Rationality and Economic Behaviour, chapter 8, pages 155-180, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-0-230-52234-3_8
    DOI: 10.1057/9780230522343_8
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    Cited by:

    1. Helena Chytilová & Zdeněk Chytil, 2014. "Ekonomické vzdělání a peněžní iluze, experimentální přístup [Economic Education and Money Illusion: An Experimental Approach]," Politická ekonomie, Prague University of Economics and Business, vol. 2014(4), pages 500-520.

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