IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/60845.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/60845/
    File Function: Open access version.
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences with Simple Tests," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 817-869.
    2. Jordi Galí & Pau Rabanal, 2005. "Technology Shocks and Aggregate Fluctuations: How Well Does the Real Business Cycle Model Fit Postwar U.S. Data?," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 225-318, National Bureau of Economic Research, Inc.
    3. George A. Akerlof, 1969. "Relative Wages and the Rate of Inflation," The Quarterly Journal of Economics, Oxford University Press, vol. 83(3), pages 353-374.
    4. Robert J. MacCulloch & Rafael Di Tella & Andrew J. Oswald, 2001. "Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness," American Economic Review, American Economic Association, vol. 91(1), pages 335-341, March.
    5. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, vol. 123(2), pages 81-104, August.
    6. Loupias, Claire & Ricart, Roland, 2004. "Price setting in France: new evidence from survey data," Working Paper Series 423, European Central Bank.
    7. Apel, Mikael & Friberg, Richard & Hallsten, Kerstin, 2005. "Microfoundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 313-338, April.
    8. Gali Jordi, 1994. "Monopolistic Competition, Business Cycles, and the Composition of Aggregate Demand," Journal of Economic Theory, Elsevier, vol. 63(1), pages 73-96, June.
    9. Mark Bils, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 699-718.
    10. Rotemberg, Julio J., 2005. "Customer anger at price increases, changes in the frequency of price adjustment and monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 829-852, May.
    11. R. L. Hall & C. J. Hitch, 1939. "Price Theory And Business Behaviour," Oxford Economic Papers, Oxford University Press, vol. 0(1), pages 12-45.
    12. Neville Francis & Valerie A. Ramey, 2009. "Measures of per Capita Hours and Their Implications for the Technology-Hours Debate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1071-1097, September.
    13. Luis J. Álvarez & Ignacio Hernando, 2005. "The price setting behaviour of Spanish firms: evidence from survey data," Working Papers 0537, Banco de España;Working Papers Homepage.
    14. Philippe Jehiel, 2005. "Analogy-Based Expectation Equilibrium," Levine's Bibliography 784828000000000106, UCLA Department of Economics.
    15. Christopher J. Nekarda & Valerie A. Ramey, 2013. "The Cyclical Behavior of the Price-Cost Markup," NBER Working Papers 19099, National Bureau of Economic Research, Inc.
    16. Alan Kackmeister, 2007. "Yesterday's Bad Times Are Today's Good Old Times: Retail Price Changes Are More Frequent Today Than in the 1890s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1987-2020, December.
    17. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 517-531.
    18. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Olivier Coibion & Yuriy Gorodnichenko & Rupal Kamdar, 2018. "The Formation of Expectations, Inflation, and the Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 56(4), pages 1447-1491, December.
    2. Alessandro Ispano & Peter Schwardmann, 2018. "Competition over Cursed Consumers," CESifo Working Paper Series 7046, CESifo Group Munich.
    3. Gabaix, Xavier, 2016. "A Behavioral New Keynesian Model," CEPR Discussion Papers 11729, C.E.P.R. Discussion Papers.
    4. Stephane Dupraz, 2017. "A Kinked-Demand Theory of Price Rigidity," 2017 Meeting Papers 387, Society for Economic Dynamics.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:60845. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LSERO Manager). General contact details of provider: http://edirc.repec.org/data/lsepsuk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.