Journal Article

Money Illusion and the Long-run Phillips Curve in Staggered Wage-setting Models

Author

  • Andrea Vaona
Publication Date

We consider the effect of money illusion - defined referring to Stevens' ratio estimation function - on the long-run Phillips curve in an otherwise standard New Keynesian model of sticky wages. We show that if households under-perceive real economic variables, negative money non-superneutralities will become more severe. On the contrary, if households over-perceive real variables, positive money non-superneutralities will arise. We also provide a welfare analysis of our results and we show that they are robust to the inclusion of varying capital into the model. Firms' (over-)under-perception of the real prices of production inputs (strengthens) weakens negative money non-superneutralities. In an appendix, we investigate how money illusion affects the short-run effects of a monetary shock.

Info

JEL Classification
E3, E20, E40, E50
DOI
10.1016/j.rie.2012.09.003

Key Words

  • dynamic general equilibrium
  • Inflation
  • monetary policy
  • Money illusion
  • Nominal inertia
  • Phillips curve
  • Phillips-Kurve
  • Stevens' ratio estimation function