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Does Money Illusion Matter? A Theoretical and Computational Model

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  • Niccolò Zaccaria

Abstract

We based our work mainly on ‘Does Money Illusion Matter?’, by E. Fehr and J. R. Tyran (AER2001) in which the authors show experimental evidence of the presence of money illusion withinsubject groups. We build up a model which provides a formal and mathematical framework of theexperiment design, and it is in principle able to explain subjects’ behaviour within the experiment.Once we had analysed the dynamic properties of our model, we have run numerical simulationsin order to see whether we were able to get the same pattern found by the authors. It turns outthat not only our model is able to give a theoretical justification of the results found in the lab, butmoreover it is able to replicate the experimental series found by the two couple of authors, up to acertain degree of fitness. Then we used a replication of the original experiment by L. Petersen andA. Winn, ‘Does Money Illusion Matter?: Comment’, (AER 2014), to test for robustness of ourmodel.

Suggested Citation

  • Niccolò Zaccaria, 2019. "Does Money Illusion Matter? A Theoretical and Computational Model," Working Papers - Economics wp2019_25.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    • Handle: RePEc:frz:wpaper:wp2019_25.rdf
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    Keywords

    Money Illusion; Computational Model; Experiments;
    All these keywords.

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