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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:wpaper:amz2436
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    File URL: https://repec.som.yale.edu/icfpub/publications/2436.pdf
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    References listed on IDEAS

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    1. Markus K. Brunnermeier & Christian Julliard, 2008. "Money Illusion and Housing Frenzies," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 135-180, January.
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    3. Campbell, J.Y. & Shiller, R.J., 1988. "Stock Prices, Earnings And Expected Dividends," Papers 334, Princeton, Department of Economics - Econometric Research Program.
    4. 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.
    5. repec:bla:jfinan:v:43:y:1988:i:3:p:661-76 is not listed on IDEAS
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    Cited by:

    1. Haertel, Thomas & Hamburg, Britta & Kusin, Vladimir, 2022. "The macroeconometric model of the Bundesbank revisited," Technical Papers 01/2022, Deutsche Bundesbank.

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