Inflation and the Price of Real Assets

Monika Piazzesi
Martin Schneider
Publication Type: 
Working Papers
Publication Year: 
2012

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 was presented at the Flow of Funds Accounts and Savings Workshop in April of 2012. The corresponding presentation and discussion are also available.

Region: 
United States and Canada
Country: 
USA
Topic: 
Flow of Funds
Topic: 
Income and Wealth
Topic: 
Economic Modeling
Topic: 
Economic History
Topic: 
Risk
Topic: 
Insurance
Topic: 
Growth