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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 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.

Suggested Citation

  • Robert Shiller, 2007. "Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models," Yale School of Management Working Papers amz2436, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:amz2436
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    References listed on IDEAS

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    Cited by:

    1. Gabriel Jiménez & Steven Ongena & José‐Luis Peydró & Jesús Saurina, 2014. "Hazardous Times for Monetary Policy: What Do Twenty‐Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk‐Taking?," Econometrica, Econometric Society, vol. 82(2), pages 463-505, March.
    2. repec:voj:journl:v:64:y:2017:i:1:p:1-16 is not listed on IDEAS
    3. Guidolin, Massimo & Pedio, Manuela, 2017. "Identifying and measuring the contagion channels at work in the European financial crises," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 117-134.
    4. 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.
    5. Hume, Michael & Sentance, Andrew, 2009. "The global credit boom: Challenges for macroeconomics and policy," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1426-1461, December.
    6. Yoon, Gawon, 2009. "Is high real interest rate persistence an intrinsic characteristic of industrialized economies?," Economic Modelling, Elsevier, vol. 26(2), pages 359-363, March.
    7. Semmler, Willi & Bernard, Lucas, 2012. "Boom–bust cycles: Leveraging, complex securities, and asset prices," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 442-465.
    8. E. Monnet & C. Wolf, 2016. "Demographic Cycle, Migration and Housing Investment: a Causal Examination," Working papers 591, Banque de France.
    9. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.

    More about this item

    Keywords

    Long-term interest rates; Stock prices; Housing prices; Real interest rates; Liquidity; Money illusion;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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