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Preferences for Fair Prices, Cursed Inferences, and the Nonneutrality of Money

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  • Erik Eyster
  • Kristof Madarasz
  • Pascal Michaillat

Abstract

This paper explains the nonneutrality of money from two assumptions: (1) consumers dislike paying prices that exceed some fair markup on firms' marginal costs; and (2) consumers under infer marginal costs from available information. After an increase in money supply, consumers underappreciate the increase in nominal marginal costs and hence partially misattribute higher prices to higher markups; they perceive transactions as less fair, which increases the price elasticity of their demand for goods; firms respond by reducing markups; in equilibrium, output increases. By raising perceived markups, increased money supply inflicts a psychological cost on consumers that can offset the benefit of increased output.

Suggested Citation

  • Erik Eyster & Kristof Madarasz & Pascal Michaillat, 2015. "Preferences for Fair Prices, Cursed Inferences, and the Nonneutrality of Money," CEP Discussion Papers dp1325, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp1325
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    References listed on IDEAS

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    Cited by:

    1. Olivier Coibion & Yuriy Gorodnichenko & Rupal Kamdar, 2018. "The Formation of Expectations, Inflation, and the Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 56(4), pages 1447-1491, December.
    2. Xavier Gabaix, 2020. "A Behavioral New Keynesian Model," American Economic Review, American Economic Association, vol. 110(8), pages 2271-2327, August.
    3. Stéphane Dupraz, 2024. "A Kinked‐Demand Theory of Price Rigidity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(2-3), pages 325-363, March.
    4. Alessandro Ispano & Peter Schwardmann, 2018. "Competition over Cursed Consumers," CESifo Working Paper Series 7046, CESifo.

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    More about this item

    Keywords

    Nonneutrality of money; fairness; cursedness; markups;
    All these keywords.

    JEL classification:

    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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