ABSTRACT
The process of the erosion of money illusion in Fisher's sense, followed by the critique of non-homogenous labor supply within Keynesian theory called for further elaboration of the existence of the money illusion concept. This has been reflected in the theory of the natural rate of unemployment, crowned later by the rational expectations hypothesis with no space left for money illusion. This chapter analyses the position of money illusion at the time of Phillips' curve utilization, during the rational expectations revolution and afterwards with the appearance of alternative theories accounting for the non-neutrality of money. It expresses that consideration about small deviations from rationality connected with behavioral economics, might alleviate the denial of the money illusion phenomenon induced by the rational expectations revolution. The behavioral features of near-rationality are well confirmed in case of employees who systematically misperceive inflation with respect to their nominal wages.
