Journal of Economic Dynamics Control （经济动力学与控制杂志》上）.pdf

Journal of Economic Dynamics Control 37 (2013) 84–103 Contents lists available at SciVerse ScienceDirect Journal of Economic Dynamics Control journal homepage: /locate/jedc Economic growth under money illusion $ Jianjun Miao a,b,n, Danyang Xie c,1 a Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215, USA b CEMA, Central University of Finance and Economics, and AFR, Zhejiang University, China c Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong a r t i c l e i n f o a b s t r a c t Article history: Empirical and experimental evidence documents that money illusion is persistent and Received 1 September 2009 widespread. This paper incorporates money illusion into a stochastic continuous-time Received in revised form monetary model of endogenous growth. We model an agent’s money illusion behavior 5 June 2012 by assuming that he maximizes nonstandard utility derived from both nominal and real Accepted 22 June 2012 quantities. Money illusion affects an agent’s perception of the growth and riskiness Available online 1 July 2012 of real wealth and distorts his consumption/savings decisions. It influences long-run JEL classification: growth via this channel. We show that the welfare cost of money illusion is negligible, D92 whereas its impact on long-run growth is noticeable even