EconPapers    
Economics at your fingertips  
 

Money Illusion and Housing Frenzies

Markus Brunnermeier and Christian Julliard

No 12810, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G12 R2 (search for similar items in EconPapers)
Date: 2006-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-ure
Note: AP EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published as Markus K. Brunnermeier & Christian Julliard, 2008. "Money Illusion and Housing Frenzies," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 21(1), pages 135-180, January.

Downloads: (external link)
http://www.nber.org/papers/w12810.pdf (application/pdf)

Related works:
Journal Article: Money Illusion and Housing Frenzies (2008) Downloads
Working Paper: Money Illusion and Housing Frenzies (2007) Downloads
Working Paper: Money illusion and housing frenzies (2006) Downloads
Working Paper: Money Illusion and Housing Frenzies (2006) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:12810

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w12810

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-19
Handle: RePEc:nbr:nberwo:12810