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

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Author Info
Shiller, Robert J. (Yale U)
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 Yale University, Department of Economics in its series Working Papers with number 29.

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Date of creation: Oct 2007
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Handle: RePEc:ecl:yaleco:29

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G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

References listed on IDEAS
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  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)
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  4. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and financial cycles," BIS Working Papers 256, Bank for International Settlements. [Downloadable!]
  5. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-52, May.
  6. Marvin Goodfriend & Robert G. King, 2005. "The Incredible Volcker Disinflation," Boston University - Department of Economics - Macroeconomics Working Papers Series WP2005-007, Boston University - Department of Economics. [Downloadable!]
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  7. 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!]
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  1. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany. [Downloadable!]
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