Brunnermeier, Markus K. and Julliard, Christian (2008) Money illusion and housing frenzies. Review of Financial Studies, 21 (1). pp. 135-180. ISSN 1465-7368
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 |
| Library of Congress subject classification: | H Social Sciences > HB Economic Theory |
| Journal of Economic Literature Classification System: | G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates R - Urban, Rural, and Regional Economics > R2 - Household Analysis |
| Sets: | Research centres and groups > Financial Markets Group (FMG) Collections > Economists Online Departments > Economics |
| Date Deposited: | 09 May 2008 14:40 |
| URL: | http://eprints.lse.ac.uk/4801/ |
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