Economic education and money illusion: An experimental approach

Abstract

Economic education is considered of prime importance nowadays with direct implications for effectiveness of monetary policy. We aim to verify with an application of experimental method, whether economic education acquired has weakening or even suppressive effects on recently resurrected phenomenon of money illusion. If our hypothesis will be proved, previous evidence about significant indirect effects of money illusion, causing significant long-lasting deviations of the economy from equilibrium after the shock, might be significantly alleviated, weakening thereby predictions of the New Keynesian model. Our findings suggest that even well-educated individuals do not have the ability to pierce the veil of money and do not form expectations properly after a fully anticipated monetary shock. As a result we can infer that money illusion is multiplied and nominal rigidities are intensified even in the economy that consists of well-educated individuals.