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

32 Pages Posted: 5 Nov 2007 Last revised: 20 Jul 2022

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

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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.

Suggested Citation

Shiller, Robert J., Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models (October 2007). NBER Working Paper No. w13558, Available at SSRN: https://ssrn.com/abstract=1027185

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