Money illusion and nominal inertia in experimental asset markets

Charles N. Noussair, Gregers Richter, Jean Robert Tyran

Research output: Contribution to journalArticlepeer-review

16 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)27-37
Number of pages11
JournalJournal of Behavioral Finance
Volume13
Issue number1
DOIs
StatePublished - 2012
Externally publishedYes

Keywords

  • Asset market bubble
  • Laboratory experiment
  • Money illusion
  • Nominal inertia
  • Nominal loss aversion

ASJC Scopus subject areas

  • Experimental and Cognitive Psychology
  • Finance

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