Correcting money illusion
can help people to understand the real rate of return earned on investments and to appreciate that a fixed nominal stream of payments has falling purchasing power over time.
is most likely to occur when inflation is unanticipated, so that people's expectations of inflation turn out to be some distance from the correct level.
Alternatively, the economy may achieve sustainable growth only at very low levels of inflation (or, per Selgin, deflation), but the money illusion
still causes unemployment at these low levels of inflation.
The concept of money illusion
is critical here," he responds.
This would lead to a transfer of wealth to debtors from creditors and would result in falling living standards via money illusion
, rising prices, currency depreciation and loss of confidence.
Currency substitution (eurization) and money illusion
as the limited factors of devaluation implementation
However, the money illusion
hypothesis states that stock market investors suffer from money illusion
and incorrectly discount real cash flows with nominal discount rates, thereby causing the market's subjective expectation of the future equity premium to deviate systematically from the rational expectations (e.
There is no money illusion
if changes in the unit of account don't change anything real.
Under the broader rubric of animal spirits as they define it, Akerlof and Shiller cite five factors that cause behavior to deviate from rationality, devoting one chapter to each of them: confidence, fairness, corruption and antisocial behavior, money illusion
, and stories.
And Friedman was surely fight to deride the idea of a long-term unemployment-inflation tradeoff depending on money illusion
This result means that reward activation generally increases with income, but was significantly higher in situations where nominal incomes and prices were both 50 per cent higher, which supports the hypothesis that activity in the ventromedial prefrontal cortex is subject to money illusion
," The Telegraph quoted Prof Falk, as saying