Brunnermeier, Markus K. and Julliard, Christian (2006) Money illusion and housing frenzies. 12810. National Bureau of Economic Research, Cambridge, MA., USA.Full text not available from this repository.
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 unlikely to rationalize this finding.
|Item Type:||Monograph (Discussion Paper)|
|Additional Information:||© 2006 Markus K. Brunnermeier and Christian Julliard|
|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
|Date Deposited:||12 May 2008 10:29|
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