Endogenous Asymmetric Money Illusion

67 Pages Posted: 27 Apr 2018 Last revised: 17 Oct 2019

See all articles by Diogo Duarte

Diogo Duarte

Florida International University (FIU) - Department of Finance

Yuri Saporito

Getulio Vargas Foundation (FGV) - EMAp - School of Applied Mathematics

Date Written: February 26, 2018

Abstract

We show that when investors suffer from endogenous asymmetric money illusion, the usual proportionality between money supply and nominal prices commonly present in frictionless economies is eliminated. This drives changes in the money supply to cause real price fluctuations. Nevertheless, the combined effect on the real state price density and the price of money leads the nominal state price density, and consequently nominal bond prices, to be independent of money illusion. This article thus provides a theoretical foundation for Modigliani-Cohn's conjecture that money illusion impacts stock markets but not bond markets.

Keywords: Money Illusion, Modigliani-Cohn Hypothesis, Money Superneutrality, Asset Pricing

JEL Classification: G12, E43, E51

Suggested Citation

Duarte, Diogo and Saporito, Yuri, Endogenous Asymmetric Money Illusion (February 26, 2018). Available at SSRN: https://ssrn.com/abstract=3159693 or http://dx.doi.org/10.2139/ssrn.3159693

Diogo Duarte (Contact Author)

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Yuri Saporito

Getulio Vargas Foundation (FGV) - EMAp - School of Applied Mathematics ( email )

Praia de Botafogo
Rio de Janeiro, 22250-900
Brazil

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