Money Illusion and Nominal Inertia in Experimental Asset Markets
30 Pages Posted: 29 Nov 2008
Date Written: November 26, 2008
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: Suggested Citation