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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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    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.
    3. Xavier Gabaix, 2020. "A Behavioral New Keynesian Model," American Economic Review, American Economic Association, vol. 110(8), pages 2271-2327, August.
    4. S. Dupraz, 2017. "A Kinked-Demand Theory of Price Rigidity," Working papers 656, Banque de France.

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    More about this item

    Keywords

    nonneutrality of money; fairness; cursedness; markups;
    All these keywords.

    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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