We consider whether the introduction of the psychological concept of loss aversion into agents' preferences could generate a macroeconomic model in which changes in the money supply can have real, persistent effects. It is demonstrated that the macroeconomic implications of loss aversion depend on the specification of the reference wage. We consider two plausible specifications: one in which the reference wage is the average wage and the other in which a worker's reference wage is the wage she was paid in the previous period.
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Length: 26 pages Date of creation: 1997 Date of revision: Handle: RePEc:mlb:wpaper:590
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Find related papers by JEL classification: C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
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