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

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Author Info
Robert J. Shiller () (Cowles Foundation, 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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File URL: http://cowles.econ.yale.edu/P/cd/d16a/d1632.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1632.

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Length: 32 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:cwl:cwldpp:1632

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Related research
Keywords: Long-term interest rates; Stock prices; Housing prices; Real interest rates; Liquidity; Money illusion;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. William C. Brainard & John B. Shoven, 1980. "The financial valuation of the return to capital," Proceedings, Federal Reserve Bank of San Francisco, pages 43-104.
  2. 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(1980-2), pages 453-512. [Downloadable!]
  3. Campbell, John Y & Shiller, Robert J, 1988. " Stock Prices, Earnings, and Expected Dividends," Journal of Finance, American Finance Association, vol. 43(3), pages 661-76, July. [Downloadable!] (restricted)
    Other versions:
  4. Brunnermeier, Markus K & Julliard, Christian, 2007. "Money Illusion and Housing Frenzies," CEPR Discussion Papers 6183, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and financial cycles," BIS Working Papers 256, Bank for International Settlements. [Downloadable!]
  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 667, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  7. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-52, May.
  8. 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(1970-1), pages 8-47. [Downloadable!]
  9. Joseph Gyourko & Christopher Mayer & Todd Sinai, 2006. "Superstar Cities," NBER Working Papers 12355, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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This page was last updated on 2009-11-12.

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