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Preferences for fair prices, cursed inferences, and the nonneutrality of money

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  • Eyster, Erik
  • Madarász, Kristóf
  • Michaillat, Pascal

Abstract

This paper explains the nonneutrality of money from two assumptions: (1) consumers dislike paying prices that exceed some fair markup on firms’ marginal costs; and (2) consumers under infer marginal costs from available information. After an increase in money supply, consumers underappreciate the increase in nominal marginal costs and hence partially misattribute higher prices to higher markups; they perceive transactions as less fair, which increases the price elasticity of their demand for goods; firms respond by reducing markups; in equilibrium, output increases. By raising perceived markups, increased money supply inflicts a psychological cost on consumers that can offset the benefit of increased output.

Suggested Citation

  • Eyster, Erik & Madarász, Kristóf & Michaillat, Pascal, 2015. "Preferences for fair prices, cursed inferences, and the nonneutrality of money," LSE Research Online Documents on Economics 60845, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:60845
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    File URL: http://eprints.lse.ac.uk/60845/
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    References listed on IDEAS

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    Cited by:

    1. Olivier Coibion & Yuriy Gorodnichenko & Rupal Kamdar, 2017. "The Formation of Expectations, Inflation and the Phillips Curve," NBER Working Papers 23304, National Bureau of Economic Research, Inc.
    2. Gabaix, Xavier, 2016. "A Behavioral New Keynesian Model," CEPR Discussion Papers 11729, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    nonneutrality of money; fairness; cursedness; markups;

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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