TAILIEUCHUNG - LOW INTEREST RATES AND HIGH ASSET PRICES: AN INTERPRETATION IN TERMS OF CHANGING POPULAR MODELS

The rising costs of health care pose a formidable challenge for policymakers. Health care already accounts for 16% of the gross domestic product (GDP) and is projected to increase to 25% by 2025. According to the Congressional Budget Office, spending on health care is likely to accelerate because of an aging population, a rising burden of chronic diseases, and higher costs for pharmaceuticals and other treatments. 2,3 Increased spending will only exacerbate current stresses on the economy, employers, government programs, and the public. Many patients are foregoing health care, especially when they encounter higher medical costs | LOW INTEREST RATES AND HIGH ASSET PRICES AN INTERPRETATION IN TERMS OF CHANGING POPULAR MODELS By Robert J. Shiller October 2007 COWLES FOUNDATION DISCUSSION PAPER NO. 1632 COWLES FOUNDATION FOR RESEARCH IN ECONOMICS YALE UNIVERSITY Box 208281 New Haven Connecticut 06520-8281 http Low Interest Rates and High Asset Prices An Interpretation in Terms of Changing Popular Economic Models By Robert J. Shiller October 2007 Low Interest Rates and High Asset Prices An Interpretation in Terms of Changing Popular Economic Models 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. Robert J. Shiller Cowles Foundation for Research in Economics 30 Hillhouse Avenue New Haven CT 06520-8281

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