Brunnermeier, Markus K. and Julliard, Christian 
ORCID: 0000-0001-8177-7441
(2008)
Money illusion and housing frenzies.
Review of Financial Studies, 21 (1).
pp. 135-180.
ISSN 0893-9454
Abstract
A reduction in inflation can fuel run-ups in housing prices if people suffer from money illusion. For example, investors who decide whether to rent or buy a house by simply comparing monthly rent and mortgage payments do not take into account the fact that inflation lowers future real mortgage costs. We decompose the price–rent ratio into a rational component—meant to capture the "proxy effect" and risk premia—and an implied mispricing. We find that inflation and nominalinterest rates explain a large share of the time series variation of the mispricing, and that the tilt effect is very unlikely to rationalize this finding.
| Item Type: | Article |
|---|---|
| Official URL: | http://rfs.oxfordjournals.org |
| Additional Information: | © 2007 the author |
| Divisions: | Financial Markets Group Economics |
| Subjects: | H Social Sciences > HB Economic Theory |
| JEL classification: | G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates R - Urban, Rural, and Regional Economics > R2 - Household Analysis |
| Date Deposited: | 09 May 2008 14:40 |
| Last Modified: | 11 Dec 2024 23:26 |
| URI: | http://eprints.lse.ac.uk/id/eprint/4801 |
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