Working Paper: NBER ID: w26740
Authors: Matteo Leombroni; Monika Piazzesi; Martin Schneider; Ciaran Rogers
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 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. 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: Inflation; Asset Prices; Household Wealth; Demographics
JEL Codes: E1; E2; E3; E44; G1; G11; G12; G5
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 the average savings rate (D14) |
| surprise inflation (E31) | erosion of financial wealth of nominal lenders (F65) |
| erosion of financial wealth of nominal lenders (F65) | decline in savings rates (D14) |
| inflation expectations (E31) | portfolio shift towards housing (G51) |
| demographic changes (J11) | decline in savings rates (D14) |
| demographic changes + surprise inflation (J11) | decline in savings rates (D14) |