Expectations and the Effects of Money Illusion

While the debate on how economic agents form expectations and how these expectationsshould be modelled has been key to modern macroeconomics, money illusion has been ananathema to macroeconomists until recently. The rational expectations revolution in the1970's thoroughly banned the study of money illusion from economists’ research agendas.Rational individuals do not exhibit illusions and because, by assumption, people behaverationally, there is nothing to study. Money illusion was a concept to be mentioned in coursesabout the history of economic thought but not a part of actual research endeavours. In fact, areliable method for getting leading journals to reject theory papers was to propagate thatmoney illusion affected individual behaviour...