Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098812 | Journal of Economic Dynamics and Control | 2013 | 20 Pages |
Abstract
Empirical and experimental evidence documents that money illusion is persistent and widespread. This paper incorporates money illusion into a stochastic continuous-time monetary model of endogenous growth. We model an agent's money illusion behavior by assuming that he maximizes nonstandard utility derived from both nominal and real quantities. Money illusion affects an agent's perception of the growth and riskiness of real wealth and distorts his consumption/savings decisions. It influences long-run growth via this channel. We show that the welfare cost of money illusion is negligible, whereas its impact on long-run growth is noticeable even if the degree of money illusion is low.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Jianjun Miao, Danyang Xie,