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Money Illusion and the Optimal Long-Run Rate of Inflation

Stiernstedt, Hannes LU (2011) NEKM01 20111
Department of Economics
Abstract (Swedish)
The conventional NAIRU model stipulates that any existing money illusion would vanish by the passage of time. In contrast, the model developed by Akerlof, Dickens and Perry (2000) (ADP) argues that inflation, instead of time, dissipate money illusion. Accordingly, there exists a possibility of an inflation unemployment tradeoff in the long run. This essay reviews the evidence of money illusion and the main criticism against the ADP-model. Furthermore, a reevaluation of the Swedish backward-bending Phillips curve derived by Lundborg and Sacklén (2006) is performed, using an updated dataset covering a longer time period with an inflation targeting regime. The results are inconclusive to whether the Phillips curve derived by Lundborg and... (More)
The conventional NAIRU model stipulates that any existing money illusion would vanish by the passage of time. In contrast, the model developed by Akerlof, Dickens and Perry (2000) (ADP) argues that inflation, instead of time, dissipate money illusion. Accordingly, there exists a possibility of an inflation unemployment tradeoff in the long run. This essay reviews the evidence of money illusion and the main criticism against the ADP-model. Furthermore, a reevaluation of the Swedish backward-bending Phillips curve derived by Lundborg and Sacklén (2006) is performed, using an updated dataset covering a longer time period with an inflation targeting regime. The results are inconclusive to whether the Phillips curve derived by Lundborg and Sacklén hold in the new time period, which warrants further analysis. (Less)
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author
Stiernstedt, Hannes LU
supervisor
organization
course
NEKM01 20111
year
type
H1 - Master's Degree (One Year)
subject
keywords
Money Illusion, Phillips curve, efficiency wages, near-rationality
language
English
id
2154721
date added to LUP
2011-09-27 08:24:50
date last changed
2011-09-27 08:24:50
@misc{2154721,
  abstract     = {The conventional NAIRU model stipulates that any existing money illusion would vanish by the passage of time. In contrast, the model developed by Akerlof, Dickens and Perry (2000) (ADP) argues that inflation, instead of time, dissipate money illusion. Accordingly, there exists a possibility of an inflation unemployment tradeoff in the long run. This essay reviews the evidence of money illusion and the main criticism against the ADP-model. Furthermore, a reevaluation of the Swedish backward-bending Phillips curve derived by Lundborg and Sacklén (2006) is performed, using an updated dataset covering a longer time period with an inflation targeting regime. The results are inconclusive to whether the Phillips curve derived by Lundborg and Sacklén hold in the new time period, which warrants further analysis.},
  author       = {Stiernstedt, Hannes},
  keyword      = {Money Illusion,Phillips curve,efficiency wages,near-rationality},
  language     = {eng},
  note         = {Student Paper},
  title        = {Money Illusion and the Optimal Long-Run Rate of Inflation},
  year         = {2011},
}