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Expectations and the Effects of Money Illusion

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Psychology, Rationality and Economic Behaviour

Part of the book series: International Economic Association Series ((IEA))

Abstract

While the debate on how economic agents form expectations and how these expectations should be modelled has been key to modern macroeconomics, money illusion has been an anathema to macroeconomists until recently. The rational expectations revolution in the 1970s thoroughly banned the study of money illusion from economists’ research agendas. Rational individuals do not exhibit illusions and because, by assumption, people behave rationally, there is nothing to study. Money illusion was a concept to be mentioned in courses on the history of economic thought but not a part of actual research endeavours. In fact, a reliable method for getting leading journals to reject theory papers was to propagate that money illusion affected individual behaviour.

* Financial support by the National Centre of Competence in Research on ‘Financial Valuation and Risk Management’ is gratefully acknowledged. The national centres in research are managed by the Swiss National Science Foundation on behalf of the federal authorities.

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Author information

Authors and Affiliations

  1. Institute for Empirical Research in Economics, University of Zurich, Switzerland

    Ernst Fehr

  2. Institute of Economics, University of Copenhagen, Denmark

    Jean-Robert Tyran

Authors
  1. Ernst Fehr
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  2. Jean-Robert Tyran
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Editor information

Editors and Affiliations

  1. Institute of Economic Growth, University of Delhi, India

    Bina Agarwal

  2. University of Siena, Italy

    Alessandro Vercelli

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© 2005 International Economic Association

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Fehr, E., Tyran, JR. (2005). Expectations and the Effects of Money Illusion. In: Agarwal, B., Vercelli, A. (eds) Psychology, Rationality and Economic Behaviour. International Economic Association Series. Palgrave Macmillan, London. https://doi.org/10.1057/9780230522343_8

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