Working Paper: CEPR ID: DP14390
Authors: Matteo Leombroni; Monika Piazzesi; Ciaran Rogers; Martin Schneider
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 overlappinggenerations 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. Disagreement about inflation across age groups matters for the size of tax effects, the volume of nominal credit, and the price of housing as collateral.
Keywords: No keywords provided
JEL Codes: E31; E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Entry of baby boomers into asset markets (J26) | Decline in household wealth-to-GDP ratio (G59) |
| Surprise inflation (E31) | Erosion of financial wealth of nominal lenders (F65) |
| Surprise inflation (E31) | Decrease in savings rates (E21) |
| Great inflation (E31) | Portfolio shift towards housing (G51) |
| Disagreement about inflation across age groups (E31) | Tax effects, nominal credit volume, and housing prices (H31) |
| Inflation expectations among different age cohorts (D15) | Asset allocation decisions (G11) |