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Money Illusion and Nominal Inertia in Experimental Asset Markets

Author

Listed:
  • Charles N. Noussair

    (Tilburg University)

  • Gregers Richter

    (Sydbank, Schweiz)

  • Jean-Robert Tyran

    (Department of Economics, University of Copenhagen)

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.

Suggested Citation

  • Charles N. Noussair & Gregers Richter & Jean-Robert Tyran, 2008. "Money Illusion and Nominal Inertia in Experimental Asset Markets," Discussion Papers 08-29, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:0829
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    File URL: http://www.econ.ku.dk/english/research/publications/wp/2008/0829.pdf
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Negative Nominal Interest Rates (again)
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-08-22 19:13:27

    Citations

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    Cited by:

    1. Tetsuo Yamamori & Kazuyuki IwataAuthor-Name: Akira Ogawa, 2014. "An Experimental Study of Money Illusion in Intertemporal Decision Making," Working Papers e85, Tokyo Center for Economic Research.
    2. Shinichi Hirota & Juergen Huber & Thomas Stock & Shyam Sunder, 2015. "Investment Horizons and Price Indeterminacy in Financial Markets," Cowles Foundation Discussion Papers 2001, Cowles Foundation for Research in Economics, Yale University.
    3. Thomas A. Stephens & Jean-Robert Tyran, 2012. "“At least I didn’t lose money” - Nominal Loss Aversion Shapes Evaluations of Housing Transactions," Discussion Papers 12-14, University of Copenhagen. Department of Economics.
    4. Jürgen Huber & Michael Kirchler, 2012. "The impact of instructions and procedure on reducing confusion and bubbles in experimental asset markets," Experimental Economics, Springer;Economic Science Association, vol. 15(1), pages 89-105, March.
    5. Schmeling, Maik & Schrimpf, Andreas, 2011. "Expected inflation, expected stock returns, and money illusion: What can we learn from survey expectations?," European Economic Review, Elsevier, vol. 55(5), pages 702-719, June.
    6. Eizo Akiyama & Nobuyuki Hanaki & Ryuchiro Ishikawa, 2012. "Effect of uncertainty about others’ rationality in experimental asset markets," AMSE Working Papers 1234, Aix-Marseille School of Economics, Marseille, France.
    7. Eizo Akiyama & Nobuyuki Hanaki & Ryuichiro Ishikawa, 2012. "Effect of Uncertainty about Others' Rationality in Experimental Asset Markets: An Experimental Analysis," Working Papers halshs-00793613, HAL.
    8. Claudio Borio & Anna Zabai, 2016. "Unconventional monetary policies: a re-appraisal," BIS Working Papers 570, Bank for International Settlements.
    9. Owen Powell & Natalia Shestakova, 2017. "The robustness of mispricing results in experimental asset markets," Vienna Economics Papers 1702, University of Vienna, Department of Economics.
    10. Joy A. Buchanan & Daniel Houser, 2017. "What if Wages Fell During a Recession?," Working Papers 1062, George Mason University, Interdisciplinary Center for Economic Science, revised Aug 2017.

    More about this item

    Keywords

    money illusion; nominal inertia; asset market bubble; nominal loss aversion; laboratory experiment;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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