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Loss Aversion and the Non-Neutrality of Money

Author

Listed:
  • McDonald, I.M.
  • Sibly, H.

Abstract

We consider whether the introduction of the psychological concept of loss aversion into agents' preferences could generate a macroeconomic model in which changes in the money supply can have real, persistent effects. It is demonstrated that the macroeconomic implications of loss aversion depend on the specification of the reference wage. We consider two plausible specifications: one in which the reference wage is the average wage and the other in which a worker's reference wage is the wage she was paid in the previous period.

Suggested Citation

  • McDonald, I.M. & Sibly, H., 1997. "Loss Aversion and the Non-Neutrality of Money," Department of Economics - Working Papers Series 590, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:590
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    Cited by:

    1. Ian M McDonald, 1997. "Discussion of 'The Debate on Alternatives for Monetary Policy in Australia'," RBA Annual Conference Volume,in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.

    More about this item

    Keywords

    MONEY ; NEUTRALITY ; WAGES ; MODELS;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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