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Money Illusion and Coordination

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  • Mekvabishvili, Rati

Abstract

Non-neutrality of money and stickiness of prices puzzled the economist for decades. The phenomenon of money illusion is one of the central aspects with this regard. Money illusion refers to the tendency to confuse nominal and real aspects of the economy. Our experimental evidences show that even one money illusion prone agent can cause inefficient outcome. Interestingly, we find that under strategic setting money illusion prone subject learns from others behavior. However, the effect of learning under strategic setting seems to be a double-edged; while money illusion free subject learns fast by imitating others to how to overcome money illusion, at the same time her previous actions distorts the aggregate behavior. As it seems, this pattern is largely responsible for the observed stability around unstable equilibrium.

Suggested Citation

  • Mekvabishvili, Rati, 2006. "Money Illusion and Coordination," MPRA Paper 93688, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:93688
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    File URL: https://mpra.ub.uni-muenchen.de/93688/1/MPRA_paper_93688.pdf
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    References listed on IDEAS

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    1. Fehr, Ernst & Tyran, Jean-Robert, 2007. "Money illusion and coordination failure," Games and Economic Behavior, Elsevier, vol. 58(2), pages 246-268, February.
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    Cited by:

    1. von Hagen, Jürgen & Kube, Sebastian & Kaiser, Johannes & Selten, Reinhard & Pope, Robin, 2006. "Prominent Numbers and Ratios in Exchange Rate Determination: Field and Laboratory Evidence," Bonn Econ Discussion Papers 29/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).

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    More about this item

    Keywords

    Money Illusion; Experiment; coordination;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics

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