Monetary illusion

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The term money illusion (engl. Money illusion ) describes the non-perception of inflation ( surprise inflation ) by the economic agents , that are subject to an illusion that the money was still the same value. In a weakened form, the illusion of value denotes an underestimation of the risk of monetary devaluation. However, since the economic subjects absorb information about price increases through statistics and their own experiences, the monetary illusion is a temporary phenomenon (freedom from monetary illusion). The illusion of money value is represented in quantity theory . Because without the illusion of money it would be almost impossible for a central bank to stimulate the economy by increasing the money supply . Even if the concept of the illusion of monetary value is deeply anchored in economics, more recent studies are taking place using interdisciplinary approaches such as behavioral economics or neuroeconomics . The formation of expectations about macroeconomic variables plays a special role. Among other things, Nobel Prize winner Herbert A. Simon has dealt with such expectations. If economic agents are able to make forecasts of inflation rates that are derived from past experience and include earlier estimation errors for correction, then one speaks of adaptive inflation expectations .

Theoretical reference

The phenomenon of illusion of the value of money is particularly important in two contexts:

Money illusion and monetary policy

Due to the delayed perception of inflation by economic agents, one of the tasks of monetary policy is to provide those affected with a long-term and as credible forecast as possible about general price developments. From the entrepreneur's point of view, this can "prevent" the insecurity of the dependent employees from being reflected in higher wage demands as a precaution.

Regardless of this, the central bank can, as part of its monetary policy, temporarily exploit the reputation it enjoys with economic agents. So she could z. For example, in times of stable prices and low wage growth, an expansionary monetary policy can lead to unforeseen higher inflation. The price increases then cause the wages of the employees to fall in real terms. For companies , this means (again in real terms) lower production costs.

Should a central bank pursue labor market targets in addition to price targets because lower production costs etc. U. could lead to the hiring of new workers, then a surprise inflation caused by it offers itself. However, this is a very dubious economic and political success, as the central bank causes several types of damage: On the one hand, the duration of a monetary illusion is limited in time, so that after a certain time wage earners will try to compensate for their real loss of income with higher wage claims. This in turn means that unemployment will return to the previous level and the overall effect is only temporary. This problem is dealt with in the context of the Phillips curve modified by expectations . On the other hand, the central bank may harm itself through such a policy, since it destroys its reliability: if the central bank causes surprise inflation, it seems plausible that it will try the same policy a second time. For this reason, the long-term inflation expectations of economic agents and thus also their wage demands may rise, so that in the long term not less, but even more unemployment could result.

Many economists conclude from these effects that it should not be the job of the central bank to exploit the monetary illusion of wage earners and other economic agents. Rather, it should convey reliability and credibility to the citizens precisely for this reason.

Money illusion and wage negotiations

In the event of wage increases, the employees concerned assume a real higher income. They spend part of this, which stimulates overall economic demand in the event of full employment and full capacity utilization of the economy. As in such a situation, higher wages delayed in higher prices reflected the real value of wages is eaten up by inflation ( wage inflation ).

The task of economic policy is therefore to limit the inflation that has occurred and (if the inflation rates are high) to break a vicious circle of ever higher inflation rates and ever higher wage demands.

In this case, however, one can only speak of an illusion of monetary value to a limited extent, since on the one hand there is real added value and, moreover, the time-delayed inflation can certainly be perceived by the wage earners.

literature

  • Georg Erber: The Problem of Money Illusion in Economics. In: Journal of Applied Economic Sciences. Vol. 5, Issue 3 (13), 2010, pp. 196-216 ( PDF file; JAES Online ).
  • Eldar Shafir, Peter Diamond & Amos Tversky: Money illusion. In: Quarterly Journal of Economics . Vol. 112, Issue 2, May 1997, pp. 341-374 ( PDF ).
  • Ernst Fehr & Jean-Robert Tyran: Does money illusion matter? In: American Economic Review . Vol. 91, No. 5, 2001, pp. 1239-1262 ( PDF ).

Web links

Footnotes

  1. ^ Hans K. Schneider, Waldemar Wittmann & Hans Würgler (eds.): Stabilization policy in the market economy. Vol. 2. Duncker & Humblot, Berlin 1975, ISBN 3-428-03558-5 (discussion, Wolfgang Stützel).
  2. ↑ Ralph Anderegg: Fundamentals of monetary theory and monetary policy. Oldenbourg, Munich / Vienna 2007, ISBN 978-3-486-58148-5 , p. 162.
  3. ↑ Martin Reimann & Bernd Weber (eds.): Neuroeconomics. Basics - Methods - Applications. Gabler, Wiesbaden 2011, ISBN 978-3-8349-0462-1 , p. 240.
  4. ^ Herbert A. Simon: Rationality in psychology and economics. In: The Journal of Business . Vol. 59, No. 4, Part 2, October 1986, pp. S209-S224 ( PDF ).