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Money illusion and the long-run Phillips curve in staggered wage-setting models

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  • Andrea Vaona

    ()
    (Department of Economics (University of Verona))

Abstract

We consider the effect of money illusion - defined referring to Stevens' ratio estimation function - on the long-run Phillips curve in an otherwise standard New Keynesian model of sticky wages. We show that if agents under-perceive real economic variables, negative money non-superneutralities will become more severe. On the contrary, if agents over-perceive real variables, positive money superneutralities will arise.

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Bibliographic Info

Paper provided by University of Verona, Department of Economics in its series Working Papers with number 14/2010.

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Length: 18
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:ver:wpaper:14/2010

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Keywords: Phillips curve; inflation; nominal inertia; monetary policy; dynamic general equilibrium; money illusion; Stevens' ratio estimation function;

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  1. Cannon, Edmund & Cipriani, Giam Pietro, 2006. "Euro-Illusion: A Natural Experiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1391-1403, August.
  2. Ernst Fehr & Jean-Robert Tyran, 2000. "Does Money Illusion Matter?," IEW - Working Papers 045, Institute for Empirical Research in Economics - University of Zurich.
  3. Liam Graham & Dennis J. Snower, 2007. "Hyperbolic Discounting and the Phillips Curve," Kiel Working Papers 1346, Kiel Institute for the World Economy.
  4. Ascari, Guido, 2002. "Staggered Price and Trend Inflation:Some Nuisances," Royal Economic Society Annual Conference 2002 10, Royal Economic Society.
  5. Andrea Vaona, 2010. "Inflation and Growth in the Long Run: A New Keynesian Theory and Further Semiparametric Evidence," Working Papers 09/2010, University of Verona, Department of Economics.
  6. Ernst Fehr & Jean-Robert Tyran, 2004. "Money illusion and coordination failure," University of St. Gallen Department of Economics working paper series 2004 2004-02, Department of Economics, University of St. Gallen.
  7. K. Huang & Z. Liu, . "Staggered price-setting, staggered wage-setting, and business cycle persistence," Working Papers 2000-28, Utah State University, Department of Economics.
  8. Devereux, Michael B. & Yetman, James, 2002. "Menu costs and the long-run output-inflation trade-off," Economics Letters, Elsevier, vol. 76(1), pages 95-100, June.
  9. Chambers,Robert G., 1988. "Applied Production Analysis," Cambridge Books, Cambridge University Press, number 9780521314275, November.
  10. Ascari, Guido, 1998. "Superneutrality Of Money In Staggered Wage-Setting Models," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 383-400, September.
  11. Shafir, Eldar & Diamond, Peter & Tversky, Amos, 1997. "Money Illusion," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 341-74, May.
  12. Graham, Liam & Snower, Dennis J., 2004. "The real effects of money growth in dynamic general equilibrium," Working Paper Series 0412, European Central Bank.
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