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BPEA Article

Movements in the Equity Premium

Abstract

REAL BOND RATES increased sharply in the early 1980s and have remained
high since. Even today, in the midst of a world recession and low
U.S. and Japanese short real rates, long real rates throughout the world
remain unusually high. Pessimists trace the high rates to a decrease in
the supply of capital. They point to the long string of fiscal deficits and to
the decline in household saving and warn of the disappearance of thrift.
Optimists trace the high rates to an increase in the demand for capital
and point to the high profit opportunities unleashed by the conservative
revolutions of the 1980s.

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