Money pp 244-247 | Cite as

Money Illusion

  • Peter Howitt
Part of the The New Palgrave book series (NPA)


The term money illusion is commonly used to describe any failure to distinguish monetary from real magnitudes. It seems to have been coined by Irving Fisher, who defined it as ‘failure to perceive that the dollar, or any other unit of money, expands or shrinks in value’ (1928, p. 4). To Fisher, money illusion was an important factor in business-cycle fluctuations. Rising prices during the upswing would stimulate investment demand and induce business firms to increase their borrowing, thus causing a rise in the nominal rate of interest. Lenders would accommodate them by increasing their savings in response to the rise in the nominal rate, not taking into account that, because of the rise in inflation, the real rate of interest had not risen but had actually fallen (Fisher, 1922, esp. ch. 4).


Monetary Policy Demand Function Nominal Wage Phillips Curve Nominal Rate 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Barro, RJ. 1977. Long-term contracting, sticky prices, and monetary policy. Journal of Monetary Economics 3(3), July, 305–16.CrossRefGoogle Scholar
  2. Feldstein, M. 1983. Inflation, Tax Rules, and Capital Formation. Chicago: University of Chicago Press.CrossRefGoogle Scholar
  3. Fischer, S. 1977. Long-term contracts, rational expectations, and the optimal money supply rule. Journal of Political Economy 85(1), February, 191–205.CrossRefGoogle Scholar
  4. Fisher, I. 1922. The Purchasing Power of Money. 2nd edn, New York: Macmillan.Google Scholar
  5. Fisher, I. 1928. The Money Illusion. New York: Adelphi.Google Scholar
  6. Friedman, M. 1968. The role of monetary policy. American Economic Review 58(1), March, 1–17.Google Scholar
  7. Haberler, G. 1941. Prosperity and Depression 3rd edn, Geneva: League of Nations.Google Scholar
  8. Howitt, P. and Patinkin, D. 1980. Utility function transformations and money illusion: comment. American Economic Review 70(3), September, 819–22.Google Scholar
  9. Leijonhufvud, A. 1968. On Keynesian Economics and the Economics of Keynes. New York: Oxford University Press.Google Scholar
  10. Leontief, W. 1936. The fundamental assumptions of Mr. Keynes’ monetary theory of unemployment. Quarterly Journal of Economics 5, November, 192–7.CrossRefGoogle Scholar
  11. Leser, C.E.V. 1943. The consumer’s demand for money. Econometrica 11(2), April, 123–40.CrossRefGoogle Scholar
  12. Patinkin, D. 1949. The indeterminacy of absolute prices in classical economic theory. Econometrica 17(1), January, 1–27.CrossRefGoogle Scholar
  13. Patinkin, D. 1961. Financial intermediaries and the logical structure of monetary theory. American Economic Review 51(1), March, 95–116.Google Scholar
  14. Samuelson, P.A. 1947. Foundations of Economic Analysis. Cambridge, Mass.: Harvard University Press.Google Scholar

Copyright information

© Palgrave Macmillan, a division of Macmillan Publishers Limited 1989

Authors and Affiliations

  • Peter Howitt

There are no affiliations available

Personalised recommendations