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Money Illusion and Strategic Complementarity as Causes of Monetary Non-Neutrality : Lecture Notes in Economic and Mathematical Systems - Jean-Robert Tyran

Money Illusion and Strategic Complementarity as Causes of Monetary Non-Neutrality

Lecture Notes in Economic and Mathematical Systems

Paperback Published: 15th July 1999
ISBN: 9783540658719
Number Of Pages: 228

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In principle, money illusion could explain the inertial adjustment of prices after changes of monetary policy. Hence, money illusion could provide an explanation of monetary non-neutrality. However, this explanation has been thoroughly discredited in modern economics. As a consequence, economists have ever since the 1970s searched for alternative explanations for nominal rigidity. These explanations are all based on the assumption of fully rational economic agents, holding rational expectations. This book argues that money illusion has been prematurely dismissed as an explanation of monetary non-neutrality. Methods of experimental economics are used to investigate the real aggregate effects of money illusion. It is shown that money illusion in fact causes (short-run) real income effects if strategic complementarity prevails. Strategic complementarity is an important characteristic of naturally occurring macroeconomies and is a recurrent theme in most models explaining nominal rigidity.

Introductionp. 1
Approaches to the Problem of Monetary Non-Neutralityp. 5
Empirical evidence on the non-neutrality of money from macroeconomic datap. 9
Selected evidence on the (non-)neutrality of moneyp. 10
Problems of empirical work in monetary macroeconomicsp. 12
Mismeasurement in macroeconomic aggregates
Problems of isolating causalities
Theories of nominal rigidity and monetary non-neutralityp. 15
Explaining monetary non-neutrality and nominal rigidity by assuming that all agents are fully rationalp. 16
Explaining monetary non-neutrality by assuming that some agents are not fully rationalp. 20
Money illusionp. 22
The psychology behind money illusionp. 25
Potential relevance of money illusion to economicsp. 28
Money illusion as a disequilibrating force
Labor markets
Further areas where money illusion may be of economic relevance
Why can money illusion and strategic complementarity cause monetary non-neutrality?p. 36
Bounded rationality and monetary non-neutrality
Money illusion and strategic properties
Summary of part I and hypothesesp. 46
Summaryp. 46
Hypothesesp. 48
Experimental Studyp. 51
Are experiments in macroeconomics possible?p. 53
What is experimental economics?
What is an experimental design?
Macroeconomics as an indirectly experimental science
Experimental design to isolate causes of monetary non-neutralityp. 60
General description of the experimental designp. 60
Experimental procedures and parametersp. 62
Description of treatmentsp. 66
Variation of representationp. 66
Real representation
Semi-real representation
Nominal representation
Variation of the strategic propertyp. 72
Advantages of the present experimental design in the investigation of monetary non-neutralityp. 76
Results of Experimental Studyp. 79
Non-neutrality with strategic complementarityp. 81
Nominal rigidity
Monetary non-neutrality
Best reply behavior
Price expectations
Loss decomposition
Subjective confidence in price expectation
Summary of chapter 1
Does money illusion matter?p. 96
Specification of hypotheses to be testedp. 97
The effect of nominal representation given strategic complementarityp. 98
Nominal rigidity
Monetary non-neutrality
Best reply behavior
Price expectations
Confidence in price expectation
The effect of representation given strategic substitutesp. 114
Nominal rigidity
Monetary non-neutrality
Summary of chapter 2p. 117
The effects of strategic complements and strategic substitutesp. 119
Specification of hypotheses to be testedp. 19
Specification of hypothesis HA2
Specification of hypothesis HA3
The effect of strategic substitutes vs. complements when the environment is represented in nominal termsp. 123
Nominal rigidity
Monetary non-neutrality
Best reply behavior
Price expectations
Confidence in price expectations
The effect of strategic properties when the environment is represented in real termsp. 135
Nominal rigidity
Monetary non-neutrality
Best reply behavior and expectations
Summary of resultsp. 140
Discussion of Resultsp. 145
Empirical relevance of resultsp. 147
Biases in favor of monetary neutrality
Biases against monetary neutrality?
Extensions and suggestions for further research
Implications for economic theory and policyp. 159
Money illusion and the rationality paradigmp. 159
Implications for macroeconomic theoryp. 163
Implications for economic policyp. 165
Appendicesp. 169
Instructionsp. 170
Income tablesp. 179
Mathematical appendixp. 200
Referencesp. 211
List of tablesp. 223
List of figuresp. 224
Author indexp. 226
Table of Contents provided by Publisher. All Rights Reserved.

ISBN: 9783540658719
ISBN-10: 3540658718
Series: Lecture Notes in Economic and Mathematical Systems
Audience: General
Format: Paperback
Language: English
Number Of Pages: 228
Published: 15th July 1999
Publisher: Springer-Verlag Berlin and Heidelberg Gmbh & Co. Kg
Country of Publication: DE
Dimensions (cm): 23.39 x 15.6  x 1.3
Weight (kg): 0.35

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