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Money illusion of interest rates and household decision-making

Author

Listed:
  • Takeshi Niizeki

    (Chiba University)

Abstract

This paper examines whether Japanese households take the Fisher equation into account when making decisions about saving, borrowing, and spending. To this end, we conduct two experiments in which hypothetical scenarios are randomly assigned. The estimation results show that households generally make decisions without taking the Fisher equation into account. In other words, many decisions are made based on nominal rather than real interest rates. In addition, we find no evidence that the more educated are less likely to suffer from money illusion. These results have important implications for the effectiveness of unconventional monetary policy.

Suggested Citation

  • Takeshi Niizeki, 2025. "Money illusion of interest rates and household decision-making," Economics Bulletin, AccessEcon, vol. 45(1), pages 111-117.
    • Handle: RePEc:ebl:ecbull:eb-24-00387
    as

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    References listed on IDEAS

    as
    1. Rüdiger Bachmann & Tim O. Berg & Eric R. Sims, 2015. "Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence," American Economic Journal: Economic Policy, American Economic Association, vol. 7(1), pages 1-35, February.
    2. Darriet, Elisa & Guille, Marianne & Vergnaud, Jean-Christophe & Shimizu, Mariko, 2020. "Money illusion, financial literacy and numeracy: Experimental evidence," Journal of Economic Psychology, Elsevier, vol. 76(C).
    3. Kelsey Berro & Gregory Colman & Dhaval Dave, 2015. "The Reality of the Real Rate," Business and Economic Research, Macrothink Institute, vol. 5(2), pages 270-287, December.
    4. Giam Pietro Cipriani & Angelo Zago & Diego Lubian, 2008. "Money Illusion: Are Economists Different?," Economics Bulletin, AccessEcon, vol. 1(3), pages 1-9.
    5. Markus K. Brunnermeier & Christian Julliard, 2008. "Money Illusion and Housing Frenzies," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 135-180, January.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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