Inflation and the price of real assets

Monika Piazzesi and Martin Schneider

No 423, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: In the 1970s, U.S. asset markets witnessed (i) a 25% dip in the ratio of aggregate household wealth relative to GDP and (ii) negative comovement of house and stock prices that drove a 20% portfolio shift out of equity into real estate. This study uses an overlapping generations model with uninsurable nominal risk to quantify the role of structural change in these events. We attribute the dip in wealth to the entry of baby boomers into asset markets, and to the erosion of bond portfolios by surprise inflation, both of which lowered the overall propensity to save. We also show that the Great Inflation led to a portfolio shift by making housing more attractive than equity. Apart from tax effects, a new channel is that disagreement about inflation across age groups drives up collateral prices when credit is nominal. ; This paper is an extension of Monika Piazzesi's and Martin Schneider's work while they were in the Research Department of the Federal Reserve Bank of Minneapolis.

Date: 2009
New Economics Papers: this item is included in nep-cba, nep-mac and nep-ure
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Inflation and the Price of Real Assets (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:423

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