TY - UNPB

T1 - Money Illusion and Nominal Inertia in Experimental Asset Markets

AU - Noussair, Charles N.

AU - Richter, Gregers

AU - Tyran, Jean-Robert

N1 - JEL classification: C9, E40

PY - 2008

Y1 - 2008

N2 - We test whether large but purely nominal shocks affect real asset market prices. We subject a laboratory asset market to an exogenous shock, which either inflates or deflates the nominal fundamental value of the asset, while holding the real fundamental value constant. After an inflationary shock, nominal prices adjust upward rapidly and we observe no real effects. However, after a deflationary shock, nominal prices display considerable inertia and real prices adjust only slowly and incompletely toward the levels that would prevail in the absence of a shock. Thus, an asymmetry is observed in the price response to inflationary and deflationary nominal shocks.

AB - We test whether large but purely nominal shocks affect real asset market prices. We subject a laboratory asset market to an exogenous shock, which either inflates or deflates the nominal fundamental value of the asset, while holding the real fundamental value constant. After an inflationary shock, nominal prices adjust upward rapidly and we observe no real effects. However, after a deflationary shock, nominal prices display considerable inertia and real prices adjust only slowly and incompletely toward the levels that would prevail in the absence of a shock. Thus, an asymmetry is observed in the price response to inflationary and deflationary nominal shocks.

KW - Faculty of Social Sciences

KW - asset market bubble

KW - nominal loss aversion

KW - laboratory experiment

M3 - Working paper

BT - Money Illusion and Nominal Inertia in Experimental Asset Markets

PB - Department of Economics, University of Copenhagen

ER -