Was it really due to easy money?

Yale's Robert J. Shiller has a forthcoming article in the Brooking Papers on Economic Activity which questions the popular interpretation that asset booms since the mid 1990s were a direct consequence of falling long-term interest rates. The paper, Low Long-Term Interest Rates and High Asset Prices (PDF), was prepared for a "Celebration of BPEA” Conference being held at the Brookings Institution last week. Here are Shiller's conclusions:

We have seen here that the big movements in stock prices and real estate prices in the last decade or so do not line up with movements in long-term interest rates over the same time period. This appears to confirm the 1988 results of Campbell and Shiller that stock prices relative to dividends or earnings are not well explainable in terms of present value models with time-varying interest rates.

Yet if we are doing very broad comparisons of the present time with another time, comparing the early 1980s when interest rates were very high with today, we might say that lower nominal interest rates are indeed a factor in the relatively higher asset prices we see today. ...Presumably, as I discussed in Irrational Exuberance, there are many factors, including speculative feedback, that have contributed to high asset prices today.

This paper began by considering a certain common belief about the way the world works which was motivation for this paper. We see that the idea that we should think of the level of long-term real interest rates as the dominant force in driving long-term asset prices up or down is not supported by the evidence.

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