Loss Aversion and the Non-Neutrality of Money
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.
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|Date of creation:||1997|
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