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

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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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  • Robert J. Shiller, 2007. "Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Models," Cowles Foundation Discussion Papers 1632, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1632
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    Cited by:

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    5. Philip Arestis Author-Email: pa267@cam.ac.uk & Ana Rosa Gonzalez-Martinez, 2017. "Housing Market in Israel: Is there a Bubble?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 64(1), pages 1-16, December.
    6. 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.
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    8. 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.
    9. 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.
    10. 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.
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    12. Willi Semmler, 2011. "Asset Prices, Booms and Recessions," Springer Books, Springer, number 978-3-642-20680-1, June.
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    14. Jiménez, Gabriel & Ongena, Steven & Peydró, José-Luis & Saurina, Jesús, 2017. "‘In the Short Run Blasé, in the Long Run Risqué’. On the Effects of Monetary Policy on Bank Credit Risk-Taking in the Short versus Long Run," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 18(3), pages 181-226.
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    16. E. Monnet & C. Wolf, 2016. "Demographic Cycle, Migration and Housing Investment: a Causal Examination," Working papers 591, Banque de France.
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    More about this item

    Keywords

    Long-term interest rates; Stock prices; Housing prices; Real interest rates; Liquidity; Money illusion;
    All these keywords.

    JEL classification:

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

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