Inflation and the Price of Real Assets

Federal Reserve Bank of Minneapolis Staff Report No. 423

Posted: 24 Jun 2009

See all articles by Monika Piazzesi

Monika Piazzesi

Stanford University; University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Martin Schneider

Stanford University

Multiple version iconThere are 3 versions of this paper

Date Written: April 1, 2009

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.

Keywords: Vertical integration, Outsourcing, Labor share, Unions, Capital intensity, Multiple equilibria

JEL Classification: L22, L23, J31

Suggested Citation

Piazzesi, Monika and Schneider, Martin, Inflation and the Price of Real Assets (April 1, 2009). Federal Reserve Bank of Minneapolis Staff Report No. 423, Available at SSRN: https://ssrn.com/abstract=1425164

Monika Piazzesi

Stanford University ( email )

Stanford, CA 94305
United States

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
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773-834-3199 (Phone)
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National Bureau of Economic Research (NBER) ( email )

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Martin Schneider (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

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