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Monetary Misperceptions, Output, and Inflation Dynamics


  • We are indebted to two anonymous referees whose comments contributed to a significant improvement of this paper. We would also like to thank B. Diba, M. Ellison, J. Galí, R. King, R. Kollmann, D. Krueger, S. Neri, S. Nukic, A. Pagan, R. Reis, P. Weil, as well as participants in ESSIM, the Hydra Workshop on Dynamic Macroeconomics, and at the University of Frankfurt, Zurich, Basel, Heidelberg and AUEB for valuable suggestions. Part of this work was done when Harris Dellas was visiting scholar at the Banque de France, under a program organized by the Fondation de la Banque de France, whose support is gratefully acknowledged.


We revisit the contribution of misperceived money to business cycles and, in particular, to the inertial dynamics of inflation following a monetary policy shock. We establish three things. First, the difference between preliminary and revised money data captures monetary misperceptions well. Second, misperceived money is quantitatively substantial and also matters significantly for economic activity. And third, imperfect information about monetary aggregates can help the standard NK model exhibit inertial inflation dynamics.

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