Abstract:
The concept of money illusion, once largely dismissed by mainstream economics, has regained prominence through recent developments in behavioral economics. It affects a wide range of markets, including financial, housing, labor, and consumption markets, as well as overall ability of firms to coordinate its prices in markets with significant repercussions. Despite several efforts by central banks and other institutions to raise economic literacy, money illusion persists, influencing decision-making in ways that challenge the assumptions of rational expectations. This research leverages experimental economics to investigate whether economic education can reduce the direct and especially indirect effects of money illusion. Recent studies, including those by Fehr and Tyran (2001), have demonstrated how money illusion can amplify coordination failures and cause long-lasting deviations from economic equilibrium, particularly in response to monetary shocks. In our research we go even further and examine whether economic literacy under certain conditions mitigates this phenomenon. Our results can bring more light into whether well-educated individuals are subject to money illusion and whether they struggle to coordinate effectively in an environment of nominal rigidities or not. These findings could either confirm or refute predictions of New Keynesian models, particularly regarding the short-run nonneutrality of money, are reinforced by the persistence of money illusion. Furthermore, the presence of money illusion in multiple markets contributes to a broader, aggregate-level intensification of economic challenges, suggesting that its impact remains substantial despite increasing efforts to educate the public.
Helena Chytilova became Associate Professor in Economics in 2018 at Prague University of Economics and Business, Czech Republic. She gained her Ph.D. in Economics in 2013 with dissertation thesis “Money Illusion and Economic Education, an Experimental Approach”, and obtained her master degree in major Economic Policy at the same institution in 2007. She also holds master degree in International Trade and European Integration acquired in degree programme at Staffordshire University (UK) and Universiteit Antwerpen (Belgium) in 2006. She has been a visiting scholar at the University of Houston, Texas (2010), at Vienna Center for Experimental Economics, University of Vienna (2013) visiting researcher at the Becker Friedman Institute for Research in Economics at the University of Chicago, (2014), visiting researcher at Ludwig Maximilian University, Munich (2018) and at University of Glasgow (2024). In present, she is Associate Professor at Prague University of Economics and Business. She used to hold position also at Charles University, Faculty of Law between year 2015-2019. She is author of the book “Economic Literacy and Money Illusion: an Experimental Perspective“, published by Routledge in 2017, for which she was awarded the rector´s prize for the best publication. Her scientific interests include experimental economics, methodology of experimental economics, economics of education and monetary economics. She has actively participated at various scientific conferences at national and international level and has published various articles in international peerreviewed journals.
The concept of money illusion, once largely dismissed by mainstream economics, has regained prominence through recent developments in behavioral economics. It affects a wide range of markets, including financial, housing, labor, and consumption markets, as well as overall ability of firms to coordinate its prices in markets with significant repercussions. Despite several efforts by central banks and other institutions to raise economic literacy, money illusion persists, influencing decision-making in ways that challenge the assumptions of rational expectations. This research leverages experimental economics to investigate whether economic education can reduce the direct and especially indirect effects of money illusion. Recent studies, including those by Fehr and Tyran (2001), have demonstrated how money illusion can amplify coordination failures and cause long-lasting deviations from economic equilibrium, particularly in response to monetary shocks. In our research we go even further and examine whether economic literacy under certain conditions mitigates this phenomenon. Our results can bring more light into whether well-educated individuals are subject to money illusion and whether they struggle to coordinate effectively in an environment of nominal rigidities or not. These findings could either confirm or refute predictions of New Keynesian models, particularly regarding the short-run nonneutrality of money, are reinforced by the persistence of money illusion. Furthermore, the presence of money illusion in multiple markets contributes to a broader, aggregate-level intensification of economic challenges, suggesting that its impact remains substantial despite increasing efforts to educate the public.