DEMAND ASYMMETRY AND MONEY ILLUSION WITH AN EXAMPLE‐MILK

Abstract

This paper examines the question of an asymmetric response by consumers to equivalent real price movements depending on whether the source of the real price movement is a change in the money price of the product itself or a change in the general price level. This asymmetry is discussed as a special but pervasive case of asymmetry due to limited information in an inflationary environment. A method is developed to capture possible asymmetric responses of this type by consumers with which it is possible to measure the degree of money illusion they exhibit. This method is then applied to the demand for milk using Australian data to show evidence of a considerable degree of money illusion.