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Money illusion and housing frenzies

Brunnermeier, Markus K. and Julliard, Christian (2007) Money illusion and housing frenzies. 6183. Centre for Economic Policy Research, London School of Economics and Political Science, London, UK.

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Identification Number: 6183

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)
Official URL: http://www.cepr.org/
Additional Information: © 2007 Markus K Brunnermeier and Christian Julliard
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
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Departments > Economics
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 05 Jun 2008 08:56
Last Modified: 27 Feb 2014 15:35
URI: http://eprints.lse.ac.uk/id/eprint/5380

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