Money Illusion and Nominal Inertia in Experimental Asset Markets

TY - JOUR

T1 - Money Illusion and Nominal Inertia in Experimental Asset Markets

AU - Noussair, Charles N.

AU - Richter, Gregers

AU - Tyran, Jean-Robert Karl

PY - 2012

Y1 - 2012

N2 - 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.

AB - 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.

U2 - 10.1080/15427560.2012.654546

DO - 10.1080/15427560.2012.654546

M3 - Journal article

SN - 1542-7560

VL - 13

SP - 27

EP - 37

JO - Journal of Behavioral Finance

JF - Journal of Behavioral Finance

IS - 1

ER -