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Jean-robert Tyran - One of the best experts on this subject based on the ideXlab platform.
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Money Illusion and household finance
Social Science Research Network, 2016Co-Authors: Thomas Alexander Stephens, Jean-robert TyranAbstract:We elicit Money Illusion and match it with financial and sociodemographic data from official registers on a quasi-representative sample of the Danish population. We find that people who are more prone to Money Illusion hold more of their gross wealth in nominal assets, including bank deposits and bonds, and less in real assets, including real estate and stocks. This bias is robust to controls for education, income, cognitive ability and other relevant characteristics. We further find that Money Illusion is a costly bias: 10-year portfolio returns are about 10 percentage points lower for individuals with high Money Illusion.
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Does Money Illusion Matter? Reply
American Economic Review, 2014Co-Authors: Ernst Fehr, Jean-robert TyranAbstract:The data in Fehr and Tyran (FT, 2001) and Luba Petersen and Abel Winn (PW,2013) show that Money Illusion plays an important role in nominal price adjustment after a fully anticipated negative monetary shock. Money Illusion affects subjects' expectations, and causes pronounced nominal inertia after a negative shock but much less inertia after a positive shock. Thus PW provide a misleading interpretation both of our and their own data.
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Money Illusion and coordination failure
Games and Economic Behavior, 2007Co-Authors: Ernst Fehr, Jean-robert TyranAbstract:Abstract Economists long considered Money Illusion to be largely irrelevant. Here we show, however, that Money Illusion has powerful effects on equilibrium selection. If we represent payoffs in nominal terms, choices converge to the Pareto inferior equilibrium; however, if we lift the veil of Money by representing payoffs in real terms, the Pareto efficient equilibrium is selected. We also show that strategic uncertainty about the other players' behavior is key for the equilibrium selection effects of Money Illusion: even though Money Illusion vanishes over time if subjects are given learning opportunities in the context of an individual optimization problem, powerful and persistent effects of Money Illusion are found when strategic uncertainty prevails.
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Expectations and the Effects of Money Illusion
Psychology Rationality and Economic Behaviour, 2005Co-Authors: Ernst Fehr, Jean-robert TyranAbstract:While the debate on how economic agents form expectations and how these expectations should be modelled has been key to modern macroeconomics, Money Illusion has been an anathema to macroeconomists until recently. The rational expectations revolution in the 1970s thoroughly banned the study of Money Illusion from economists’ research agendas. Rational individuals do not exhibit Illusions and because, by assumption, people behave rationally, there is nothing to study. Money Illusion was a concept to be mentioned in courses on the history of economic thought but not a part of actual research endeavours. In fact, a reliable method for getting leading journals to reject theory papers was to propagate that Money Illusion affected individual behaviour.
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Money Illusion and coordination failure
2004Co-Authors: Ernst Fehr, Jean-robert TyranAbstract:Economists long considered Money Illusion to be largely irrelevant. Here we show, however, that Money Illusion has powerful effects on equilibrium selection. If we represent payoffs in nominal terms, choices converge to the Pareto inefficient equilibrium; however, if we lift the veil of Money by representing payoffs in real terms, the Pareto efficient equilibrium is selected. We also show that strategic uncertainty about the other players' behavior is key for the equilibrium selection effects of Money Illusion: even though Money Illusion vanishes over time if subjects are given learning opportunities in the context of an individual optimization problem, powerful and persistent effects of Money Illusion are found when strategic uncertainty prevails.
Ernst Fehr - One of the best experts on this subject based on the ideXlab platform.
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Does Money Illusion Matter? Reply
American Economic Review, 2014Co-Authors: Ernst Fehr, Jean-robert TyranAbstract:The data in Fehr and Tyran (FT, 2001) and Luba Petersen and Abel Winn (PW,2013) show that Money Illusion plays an important role in nominal price adjustment after a fully anticipated negative monetary shock. Money Illusion affects subjects' expectations, and causes pronounced nominal inertia after a negative shock but much less inertia after a positive shock. Thus PW provide a misleading interpretation both of our and their own data.
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Money Illusion and coordination failure
Games and Economic Behavior, 2007Co-Authors: Ernst Fehr, Jean-robert TyranAbstract:Abstract Economists long considered Money Illusion to be largely irrelevant. Here we show, however, that Money Illusion has powerful effects on equilibrium selection. If we represent payoffs in nominal terms, choices converge to the Pareto inferior equilibrium; however, if we lift the veil of Money by representing payoffs in real terms, the Pareto efficient equilibrium is selected. We also show that strategic uncertainty about the other players' behavior is key for the equilibrium selection effects of Money Illusion: even though Money Illusion vanishes over time if subjects are given learning opportunities in the context of an individual optimization problem, powerful and persistent effects of Money Illusion are found when strategic uncertainty prevails.
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Expectations and the Effects of Money Illusion
Psychology Rationality and Economic Behaviour, 2005Co-Authors: Ernst Fehr, Jean-robert TyranAbstract:While the debate on how economic agents form expectations and how these expectations should be modelled has been key to modern macroeconomics, Money Illusion has been an anathema to macroeconomists until recently. The rational expectations revolution in the 1970s thoroughly banned the study of Money Illusion from economists’ research agendas. Rational individuals do not exhibit Illusions and because, by assumption, people behave rationally, there is nothing to study. Money Illusion was a concept to be mentioned in courses on the history of economic thought but not a part of actual research endeavours. In fact, a reliable method for getting leading journals to reject theory papers was to propagate that Money Illusion affected individual behaviour.
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Money Illusion and coordination failure
2004Co-Authors: Ernst Fehr, Jean-robert TyranAbstract:Economists long considered Money Illusion to be largely irrelevant. Here we show, however, that Money Illusion has powerful effects on equilibrium selection. If we represent payoffs in nominal terms, choices converge to the Pareto inefficient equilibrium; however, if we lift the veil of Money by representing payoffs in real terms, the Pareto efficient equilibrium is selected. We also show that strategic uncertainty about the other players' behavior is key for the equilibrium selection effects of Money Illusion: even though Money Illusion vanishes over time if subjects are given learning opportunities in the context of an individual optimization problem, powerful and persistent effects of Money Illusion are found when strategic uncertainty prevails.
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Does Money Illusion matter
American Economic Review, 2001Co-Authors: Ernst Fehr, Jean-robert TyranAbstract:This chapter investigates whether Money Illusion is a cause of nominal rigidity and monetary non-neutrality.
Andrea Vaona - One of the best experts on this subject based on the ideXlab platform.
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Searching for Money Illusion in Europe
2015Co-Authors: A. Montagnoli, Andrea VaonaAbstract:We apply recent Money Illusion tests on data on individual life satisfaction from the Eurobarometer for the period 1980–2003. The null hypothesis of no Money Illusion cannot be rejected. Different nominal rigidities across European countries and EMU countries, specifically, cannot be explained by different degrees of Money Illusion.
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Money Illusion and the long-run Phillips curve in staggered wage-setting models
Research in Economics, 2013Co-Authors: Andrea VaonaAbstract:Abstract 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 the Appendix, we investigate how Money Illusion affects the short-run effects of a monetary shock.
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Money Illusion and the long run phillips curve in staggered wage setting models
2010Co-Authors: Andrea VaonaAbstract: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 agents under-perceive real economic variables, negative Money non-superneutralities will become more severe. On the contrary, if agents over-perceive real variables, positive Money superneutralities will arise.
Abel Winn - One of the best experts on this subject based on the ideXlab platform.
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Does Money Illusion Matter?: Reply By ERNST FEHR AND JEAN-ROBERT TYRAN*
2016Co-Authors: The Data In Fehr, Luba Petersen, Abel WinnAbstract:2013) show that Money Illusion plays an important role in nominal price adjustment after a fully anticipated negative monetary shock. Money Illusion affects subjects ’ expectations, and causes pronounced nominal inertia after a negative shock but much less inertia after a positive shock. Thus PW provide a misleading interpretation both of our and their own data. In Fehr and Tyran (FT, 2001), we examine the role of Money Illusion in the adjustment of nominal prices after a fully anticipated monetary shock in a price setting game with strategic complementarity. We show that nominal prices adjust much more slowly to the new equilibrium after a negative shock in the presence of the “veil of Money”, i.e. when we present payoff information in nominal terms compared to when we present it in real terms. In contrast, nominal prices adjust relatively quickly to the new equilibrium after a positive monetary shock even under the veil of Money, suggesting that Money Illusion exerts asymmetric effects across fully anticipated positive and negative shocks. Petersen and Winn (PW, 2012) question our interpretation of the evidence in terms of Money Illusion and claim that Money Illusion only plays a slight or no role in post-shock price adjustment. In the following, we challenge PW’s conclusions and argue that PW’s main claims are misleading and no
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Does Money Illusion Matter? Comment
American Economic Review, 2014Co-Authors: Luba Petersen, Abel WinnAbstract:Abstract This paper experimentally investigates whether Money Illusion generates substantial nominal inertia. Building on the design of Fehr and Tyran (2001), we find no evidence that agents choose high nominal payoffs over high real payoffs. However, participants do select prices associated with high nominal payoffs within a set of maximum real payoffs as a heuristic to simplify their decision task. The cognitive challenge of this task explains the majority of the magnitude of nominal inertia; Money Illusion exerts only a second-order effect. The duration of nominal inertia depends primarily on participants' best response functions, not the prevalence of Money Illusion. (JEL C91, D21, D83, E31, E41, E52, L11)
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The Role of Money Illusion in Nominal Price Adjustment
2012Co-Authors: Luba Petersen, Abel WinnAbstract:Our experiments refine and extend the work of Fehr and Tyran (2001), who suggest that Money Illusion can contribute significantly to nominal inertia in strategically complementary environments. By controlling for strategic uncertainty, visual focal points and cognitive load we find that participants exhibit no first order Money Illusion, though second order Money Illusion plays a minor role. The presence of a focal point in our experiments reduces the duration of price stickiness compared to FT’s original experiments when participants played against one another. What stickiness remains is explained by the difficulty of finding the NE among 1800 payoffs. Second order Money Illusion appears to explain the persistent asymmetry between price adjustment following positive and negative monetary shocks. However, this is a modest effect manifested in an apparent preference for (aversion to) high (low) nominal payoffs within a set of maximum real payoffs. These findings indicate that FT’s proposed form of Money Illusion is not a compelling explanation for sluggish price adjustment.
Mariko Shimizu - One of the best experts on this subject based on the ideXlab platform.
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Money Illusion, financial literacy and numeracy: experimental evidence
Journal of Economic Psychology, 2020Co-Authors: Elisa Darriet, Marianne Guille, Jean-christophe Vergnaud, Mariko ShimizuAbstract:Abstract Money Illusion is usually defined as the inability of individuals to correctly account for inflation or deflation when making decisions. Empirical evidence shows that Money Illusion matters in financial decisions, particularly those made by households. In this article, we analyze Money Illusion at the individual level within the context of financial choices and study its relationship with numeracy and financial literacy. To do so, we propose an original measure of Money Illusion via an experimental task. This task consists of a series of choices between a pair of simple bonds whose returns are affected only by inflation (or deflation). We provide a fine-grained measure of Money Illusion that is correlated with typical measures (questionnaires) of it. Moreover, we show that Money Illusion depends on the choice context (e.g., inflation or deflation) and participants’ abilities. Individuals with financial knowledge are less sensitive to Money Illusion than others, while there is no evidence of an impact of numeracy.
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Money Illusion, financial literacy and numeracy: experimental evidence
2019Co-Authors: Elisa Darriet, Marianne Guille, Jean-christophe Vergnaud, Mariko ShimizuAbstract:Money Illusion is usually defined as the inability of individuals to correctly account for inflation or deflation when making decisions. Empirical evidence shows that Money Illusion matters in financial decisions, particularly those made by households. In this article, we analyze Money Illusion at the individual level within the context of financial choices and study its relationship with numeracy and financial literacy. To do so, we propose an original measure of Money Illusion via an experimental task. This task consists of a series of choices between a pair of simple bonds whose returns are affected only by inflation (or deflation). We provide a fine-grained measure of Money Illusion that is correlated with typical measures (questionnaires) of it. Moreover, we show that Money Illusion depends on the choice context (e.g., inflation or deflation) and participants’ abilities. Individuals with financial knowledge are less sensitive to Money Illusion than others, while there is no evidence of an impact of numeracy. (This abstract was borrowed from another version of this item.)
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Why do high ability people also suffer from Money Illusion? Experimental evidence of behavioral contradiction
General Association of Economists from Romania, 2019Co-Authors: Mariko ShimizuAbstract:Money Illusion refers to the tendency of the individuals’ decisions to be influenced by the nominal amount of Money. It is a persistent phenomenon even for high ability people such as professional investors, and causes considerable aggregate nominal inertia. However, it has not been well discussed why they suffer from Money Illusion even though they are able to distinguish the nominal and real value. In this paper, we focus on numerical ability and investigate its relation to the tendency to suffer from Money Illusion. We show subjects two alternative funds (one fund has a higher nominal value and the other fund has a higher real value) and asked which one is preferable. Subsequently, they evaluated the attractiveness of each fund with a scale from 0 to 10. Results show that high numeracy generally helps to distinguish the nominal and real value. However, when high numeracy individuals consider well-being, their decision is strongly affected by nominal value. Additionally, even though the high numeracy subjects were able to distinguish the nominal and real value, they evaluate the attractiveness of the fund with the high real value significantly lower than the fund with the high nominal value. Those behavioral tendencies prominently appeared when the nominal values are shown by the balance of assets. The contradictory behaviors of high numeracy individuals may be largely involved in the integral emotions which accompanying with the nominal value
