Brunnermeier, Markus K. and Julliard, Christian (2006) Money illusion and housing frenzies. 579. Financial Markets Group, London School of Economics and Political Science, London, UK.
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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 that inflation lowers future real mortgage costs. We decompose the price-rent ratio in a rational component — meant to capture the proxy effect and risk premia — and an implied mispricing. We find that inflation and nominal interest 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: | Monograph (Discussion Paper) |
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| Official URL: | http://fmg.lse.ac.uk |
| Additional Information: | © 2006 the authors |
| 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 Collections > LSE Financial Markets Group (FMG) Working Papers |
| Identification Number: | 579 |
| Date Deposited: | 09 May 2008 15:35 |
| URL: | http://eprints.lse.ac.uk/4806/ |
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