Money Illusion and Nominal Inertia in Experimental Asset Markets

30 Pages Posted: 29 Nov 2008

See all articles by Charles N. Noussair

Charles N. Noussair

Tilburg University

Gregers Richter

Sydbank

Jean-Robert Tyran

University of Vienna; University of Copenhagen - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: November 26, 2008

Abstract

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.

Keywords: money illusion, nominal inertia, asset market bubble, nominal loss aversion, laboratory experiment

JEL Classification: C9, E40

Suggested Citation

Noussair, Charles N. and Richter, Gregers and Tyran, Jean-Robert, Money Illusion and Nominal Inertia in Experimental Asset Markets (November 26, 2008). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 08-29, Available at SSRN: https://ssrn.com/abstract=1307717 or http://dx.doi.org/10.2139/ssrn.1307717

Charles N. Noussair

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Gregers Richter

Sydbank ( email )

Switzerland
+41 (0)71 227 81 24 (Phone)

Jean-Robert Tyran (Contact Author)

University of Vienna ( email )

Oskar-Morgenstern-Platz 1
Vienna, Vienna 1090
Austria

HOME PAGE: http://homepage.univie.ac.at/jean-robert.tyran/

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+45 353 23 027 (Phone)

HOME PAGE: http://www.econ.ku.dk/tyran/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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