Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models
Robert J. Shiller
Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance
Cowles Foundation Discussion Paper No. 1632
Yale Economics Department Working Paper No. 29
Yale ICF Working Paper No. 07-17
There has been a widespread perception in the past few years that long-term asset prices are generally high because monetary authorities have effectively kept long-term interest rates, which the market uses to discount cash flows, low. This perception is not accurate. Long-term interest rates have not been especially low. What has changed to produce high asset prices appears instead to be changes in popular economic models that people actually rely on when valuing assets. The public has mostly forgotten the concept of "real interest rate." Money illusion appears to be an important factor to consider.
Number of Pages in PDF File: 33
Keywords: Long-term interest rates, Stock prices, Housing prices, Real interest rates, Liquidity, Money illusion
JEL Classification: G12working papers series
Date posted: October 22, 2007
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