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

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  • Robert J Shiller

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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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000001682.

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Date of creation: 15 Nov 2007
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Handle: RePEc:cla:levrem:122247000000001682

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  1. 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, vol. 11(2), pages 453-512.
  2. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," NBER Working Papers 2511, National Bureau of Economic Research, Inc.
  3. Markus K. Brunnermeier & Christian Julliard, 2006. "Money Illusion and Housing Frenzies," NBER Working Papers 12810, National Bureau of Economic Research, Inc.
  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. 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, vol. 15(2), pages 273-334.
  6. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 667, Cowles Foundation for Research in Economics, Yale University.
  7. 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.
  8. 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.
  9. Robert J. Gordon, 1970. "The Recent Acceleration of Inflation and Its Lessons for the Future," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(1), pages 8-47.
  10. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and financial cycles," BIS Working Papers 256, Bank for International Settlements.
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Cited by:
  1. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.
  2. Robert Shiller, 2007. "Understanding Recent Trends in House Prices and Home Ownership," Yale School of Management Working Papers, Yale School of Management amz2557, Yale School of Management, revised 01 Nov 2007.
  3. Willi Semmler & Lucas Bernard, 2011. "Boom-Bust Cycles: Leveraging, Complex Securities, and Asset Prices," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c016_034, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. 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.
  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.

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