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

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  • Robert J. Shiller

    (Yale University)

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.

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Bibliographic Info

Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 38 (2007)
Issue (Month): 2 ()
Pages: 111-134

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Handle: RePEc:bin:bpeajo:v:38:y:2007:i:2007-2:p:111-134

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Keywords: macroeconomics; Low Interest Rates; High Asset Prices; Popular Economic Models;

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References

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  1. Brunnermeier, Markus K & Julliard, Christian, 2007. "Money Illusion and Housing Frenzies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6183, C.E.P.R. Discussion Papers.
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  3. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
  4. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, American Economic Association, vol. 68(2), pages 348-52, May.
  5. Brainard, William C. & Shoven, John B., 1980. "The financial valuation of the return to capital," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue 4, pages 43-104.
  6. Campbell, John & Shiller, Robert, 1988. "Stock Prices, Earnings, and Expected Dividends," Scholarly Articles 3224293, Harvard University Department of Economics.
  7. Olivier J. Blanchard & Lawrence H. Summers, 1984. "Perspectives on High World Real Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 273-334.
  8. Goodfriend, Marvin & King, Robert G., 2005. "The incredible Volcker disinflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(5), pages 981-1015, July.
  9. Shiller, Robert J., 2007. "Understanding Recent Trends in House Prices and Home Ownership," Working Papers, Yale University, Department of Economics 28, Yale University, Department of Economics.
  10. Joseph Gyourko & Christopher Mayer & Todd Sinai, 2013. "Superstar Cities," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 5(4), pages 167-99, November.
  11. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and financial cycles," BIS Working Papers, Bank for International Settlements 256, Bank for International Settlements.
  12. William C. Brainard & John B. Shoven & Laurence Weiss, 1980. "The Financial Valuation of the Return to Capital," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 11(2), pages 453-512.
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Cited by:
  1. Aizenman, Joshua & Jinjarak, Yothin, 2009. "Current account patterns and national real estate markets," Journal of Urban Economics, Elsevier, vol. 66(2), pages 75-89, September.
  2. Hume, Michael & Sentance, Andrew, 2009. "The global credit boom: challenges for macroeconomics and policy," Discussion Papers, Monetary Policy Committee Unit, Bank of England 27, Monetary Policy Committee Unit, Bank of England.
  3. Semmler, Willi & Bernard, Lucas, 2012. "Boom–bust cycles: Leveraging, complex securities, and asset prices," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 81(2), pages 442-465.
  4. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9142, University Library of Munich, Germany.
  5. Gabriel Jiménez & Steven Ongena & José Luis Peydró & Jesús Saurina, 2009. "Hazardous times for monetary policy: What do twenty-three million bank loans say about the effects of monetary policy on credit risk-taking?," Banco de Espa�a Working Papers, Banco de Espa�a 0833, Banco de Espa�a.
  6. Yoon, Gawon, 2009. "Is high real interest rate persistence an intrinsic characteristic of industrialized economies?," Economic Modelling, Elsevier, Elsevier, vol. 26(2), pages 359-363, March.

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