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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. Ascari, Guido, 2002. "Staggered Price and Trend Inflation:Some Nuisances," Royal Economic Society Annual Conference 2002 10, Royal Economic Society.
  2. Ernst Fehr & Jean-Robert Tyran, 2001. "Does Money Illusion Matter?," American Economic Review, American Economic Association, vol. 91(5), pages 1239-1262, December.
  3. Ernst Fehr & Jean-Robert Tyran, 2004. "Money Illusion and Coordination Failure," CESifo Working Paper Series 1141, CESifo Group Munich.
  4. Ascari, Guido, 1998. "Superneutrality Of Money In Staggered Wage-Setting Models," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 383-400, September.
  5. Graham, Liam & Snower, Dennis J., 2008. "Hyperbolic discounting and the Phillips curve," Open Access Publications from Kiel Institute for the World Economy 4262, Kiel Institute for the World Economy (IfW).
  6. Chambers,Robert G., 1988. "Applied Production Analysis," Cambridge Books, Cambridge University Press, number 9780521314275.
  7. Vaona, Andrea, 2012. "Inflation And Growth In The Long Run: A New Keynesian Theory And Further Semiparametric Evidence," Macroeconomic Dynamics, Cambridge University Press, vol. 16(01), pages 94-132, February.
  8. Shafir, Eldar & Diamond, Peter & Tversky, Amos, 1997. "Money Illusion," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 341-74, May.
  9. Edmund Cannon & Giam Pietro Cipriani, 2003. "Euro-illusion: a natural experiment," Bristol Economics Discussion Papers 03/556, Department of Economics, University of Bristol, UK.
  10. Graham, Liam & Snower, Dennis J., 2004. "The real effects of money growth in dynamic general equilibrium," Working Paper Series 0412, European Central Bank.
  11. Vaona, Andrea & Snower, Dennis, 2008. "Increasing returns to scale and the long-run Phillips curve," Economics Letters, Elsevier, vol. 100(1), pages 83-86, July.
  12. 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.
  13. Brandstatter, Eduard & Brandstatter, Hermann, 1996. "What's money worth? Determinants of the subjective value of money," Journal of Economic Psychology, Elsevier, vol. 17(4), pages 443-464, August.
  14. Huang, Kevin X. D. & Liu, Zheng, 2002. "Staggered price-setting, staggered wage-setting, and business cycle persistence," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 405-433, March.
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