Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models

Shiller, Robert J.

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Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models

Cowles Foundation Discussion Paper No. 1632

Yale Economics Department Working Paper No. 29

Yale ICF Working Paper No. 07-17

33 Pages Posted: 22 Oct 2007

See all articles by Robert J. Shiller

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

There are 2 versions of this paper

Date Written: October 2007

Abstract

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.

Keywords: Long-term interest rates, Stock prices, Housing prices, Real interest rates, Liquidity, Money illusion

JEL Classification: G12

Suggested Citation: Suggested Citation

Shiller, Robert J., Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models (October 2007). Cowles Foundation Discussion Paper No. 1632, Yale Economics Department Working Paper No. 29, Yale ICF Working Paper No. 07-17, Available at SSRN: https://ssrn.com/abstract=1023622