ARTICLE
TITLE

Controlled floating and the confused issue of money illusion

SUMMARY

The article deal with the issue of money illusion - a lack of sufficient realisation that one’s income in the relevant sense depends on prices as well as on the nominal size of the income. It begins with a general appraisal of problems faced in a currency system of controlled floating. The author then turns to a detailed analysis of whether money illusion is responsible for any existing differences between the domestic side-effects of achieving current-account objectives under exchange-rate flexibility on the one hand, and achieving these objectives under fixed rates on the other. The author concludes with suggestions concerning the 1972 American balance-of-trade effects of the 1971 exchange-rate modifications. JEL: E42, E31, F32

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