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On the Consistency of Money Illusion in New Keynesian Models

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  • Kengo NUTAHARA

Abstract

This paper compares alternative ways of modeling money illusion in New Keynesian frameworks. We examine nominal consumption in utility, real-wage misperception, and inflation misperception under labor-augmenting technological growth. The first two approaches generally introduce direct dependence on the price level or require additional preference normalizations to preserve the benchmark balanced-growth path. Modeling money illusion as misperception of current and expected inflation preserves the standard growth structure while generating wedges in labor supply and intertemporal demand. Inflation misperception provides a tractable benchmark for future quantitative macroeconomic analysis.

Suggested Citation

  • Kengo NUTAHARA, 2026. "On the Consistency of Money Illusion in New Keynesian Models," CIGS Working Paper Series 26-009E, The Canon Institute for Global Studies.
    • Handle: RePEc:cnn:wpaper:26-009e
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    1. Kengo NUTAHARA & Daichi SHIRAI, 2026. "Money Illusion and Business Cycle Fluctuations: Evidence from Japan," CIGS Working Paper Series 26-008E, The Canon Institute for Global Studies.
    2. Vaona, Andrea, 2013. "Money illusion and the long-run Phillips curve in staggered wage-setting models," Research in Economics, Elsevier, vol. 67(1), pages 88-99.
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    Cited by:

    1. Kengo NUTAHARA & Daichi SHIRAI, 2026. "Money Illusion and Business Cycle Fluctuations: Evidence from Japan," CIGS Working Paper Series 26-008E, The Canon Institute for Global Studies.

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