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It is hypothesized that constant payment mortgages (imposed, in part, by regulation) lead to distortions in the housing market in the face of anticipated inflation. The nature of this distortion is specified within a model of the housing market. Evidence is presented supporting the existence of the distortion. Moreover, this evidence is found to be robust to various structural and reduced form specifications of the model. A concluding section uses simulation to estimate the total loss to the housing stock up to 1974 attributable to the distortion. It is also shown that the production mix is affected by the inflation-induced distortion.
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J. R. Kearl (1979) studied this question.
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