Department of Economics and Business Economics

Disappearing money illusion

Research output: Working paper/Preprint Working paperResearch


  • rp18_24

    Final published version, 558 KB, PDF document

In long-term US stock market data the price-dividend ratio strongly predicts future inflation with a positive slope coefficient up to the mid 1970s. Thereafter, the predictability turns negative. We argue that this phenomenon reflects money illusion that disappears during the 1970s. We develop a consumption-based asset pricing model with recursive preferences and either money illusion or inflation non-neutrality that can explain the predictive patterns. The model is also consistent with a structural shift around the mid 1970s in the real interest rate - inflation relationship, thus supporting the hypothesis of disappearing money illusion at that time.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages44
Publication statusPublished - 21 Aug 2018
SeriesCREATES Research Papers

See relations at Aarhus University Citationformats

Download statistics

No data available

ID: 131536533