Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models
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.
This paper was prepared for the "Celebration of BPEA" Conference, Brookings Institution, September 6 and 7, 2007. The author is indebted to Tyler Ibbotson-Sindelar for research assistance and to William Gale and Douglas Elmendorf for helpful comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Robert J. Shiller, 2007. "Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(2007-2), pages 111-134. citation courtesy of