Preferences for fair prices, cursed inferences, and the nonneutrality of money

Eyster, Erik, Madarász, Kristóf ORCID: 0009-0008-8053-3937 and Michaillat, Pascal (2015) Preferences for fair prices, cursed inferences, and the nonneutrality of money. CEP Discussion Papers (CEPDP1325). Centre for Economic Performance (CEP), London, UK.

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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.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://cep.lse.ac.uk/pubs/download/dp1325.pdf
Additional Information:	© 2015 The Authors
Divisions:	Centre for Economic Performance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E10 - General E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E40 - General
Date Deposited:	04 Feb 2015 15:07
Last Modified:	01 Nov 2024 04:09
Funders:	Economic and Social Research Council
URI:	http://eprints.lse.ac.uk/id/eprint/60845

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