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Money illusion and housing frenzies

Brunnermeier, Markus K. and Julliard, Christian (2006) Money illusion and housing frenzies. 12810. National Bureau of Economic Research, Cambridge, MA., USA.

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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 unlikely to rationalize this finding.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.nber.org
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
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 12810
Date Deposited: 12 May 2008 10:29
URL: http://eprints.lse.ac.uk/4815/

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