Money Illusion and the Optimal Long-Run Rate of Inflation
The conventional NAIRU model stipulates that any existing money illusion would vanish by the passage of time. In contrast, the model developed by Akerlof, Dickens and Perry (2000) (ADP) argues that inflation, instead of time, dissipate money illusion. Accordingly, there exists a possibility of an inflation unemployment tradeoff in the long run. This essay reviews the evidence of money illusion and