Publication Date: October 2007
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.
Long-term interest rates, Stock prices, Housing prices, Real interest rates, Liquidity, Money illusion
JEL Classification Codes: G12
Published in Brookings Papers on Economic Activity (2007), 2: 111-132 [JSTOR]