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Behavioral dynamics in Turkish housing market: the roleof inflation

Çiftçi, Muhsi
This study investigates the behavioral effects of money illusioned individuals on the Turkish housing market. When individuals make a decision between buying or renting a house, they compare the monthly burden of buying a house and the rent payment. Although rational individuals make a decision based on real interest rates, the money illusioned agents use real and nominal interest rates interchangeably. Therefore, a potential inflation shock makes them think of real and nominal rates moving together. By amplifying the magnitude of nominal rates, this shock will seemingly increase the cost of buying housing and agents, in turn, decline the housing demand. An empirical investigation shows that a proxy for money illusion is largely explained by inflation itself and proves the existence of money illusioned behaviors in the housing market. Further robustness checks and analysis for market frictions also empower the results.