"Does
Money Illusion Matter?" American Economic Review, 19(5): 1239-62.
The
money illusion even bleeds into impressions of the "strength" of the economy, as if a high level of GDP growth or a bull market are indicators of the health of something called the economy.
* Kelly Shue, Yale University and NBER, and Richard Townsend, University of California, San Diego, "
Money Illusion in Asset Pricing"
Many people suffer from
money illusion, meaning that they think in terms of nominal rather than real monetary values.
Money illusion 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.
"The concept of
money illusion is critical here," he responds.
This enabled Friedman to avoid, wittingly or unwittingly, another strand of inflationary gap discussion with 1942 roots--namely, consumer
money illusion, Smithies (1942).
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
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.
Such a behaviour has been described for years by economists as the '
money illusion'.
