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BPEA Article

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


MANY HAVE NOTED THAT we appear to be living in an era of low long-term
interest rates and high asset prices. Although long-term rates have been
increasing in the last few years, rates so far in the twenty-first century are
still commonly described as low, in both nominal and real terms, compared
with historical averages or with a decade or two ago. Meanwhile stock
prices, home prices, commercial real estate prices, land prices, and even oil
and other commodity prices are said to be very high.1 The two phenomena
appear to be connected: elementary finance theory states that if the long-term
real interest rate is low, the rate of discount used to determine present values
will also be low, and hence present values should be high. This pair of phenomena,
connected through the present-value relation, is often described
as one of the most powerful forces operating on the world economy today.


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