Do Low Interest Rates Ensure High Asset Prices?

That is enough to shake asset prices worldwide.

Funds switched out of Japan have shifted to other financial markets, with the chase for yield driving up asset prices and lowering interest rates.

With higher financial asset prices, those firms that ought to be expanding and hiring will be able to get money on more attractive terms.

When asset prices overshoot reality, eventually they have nowhere to go but down.

As a result, China s inflation, as well as asset prices, remain under control.

When interest rates fall, the opposite effect on asset prices may be predicted.

Financial bubbles emerge wherever liquid asset markets exist.

The government may have to shore up the financial system if the changes in asset prices that undermined the dollar sink risk loving or imprudent lenders.

Cochrane accuses Krugman of misleading his readers about the efficient market theory, which asserts that, given the available information, financial markets always get asset prices right.

Rising asset prices lead to a general increase in purchasing power, because many asset holders are willing (and able) to borrow more.

Today, the smart money in financial markets takes a long term view that asset prices are for the most part rational expectations of discounted future fundamental values.

Easing monetary policy won t solve this kind of crisis, because even moderately lower interest rates cannot boost asset prices enough to restore the financial system to solvency.

Historically, real rates have jumped around a lot, showing little correlation with asset prices.

The crisis culminated in a collapse of asset prices at the end of 2008.

The cure depends on which of three modes define the fall in asset prices.

For some reason, asset prices get way out of whack and rise to unsustainable levels.

Asset prices create a large wealth effect that determines how financially well off people feel.

He says that it merely reflects a feedback mechanism that is always present any initial upward shock to asset prices strengthens the balance sheets of financial institutions, so in response they borrow more and bid up prices even more.

Businesses that ought to be expanding and hiring cannot, because the depressed general level of financial asset prices prevents them from borrowing money or selling bonds on profitable terms.

MILAN It is about 18 months since the financial crisis hit, and 12 months since the panic started to recede, with asset prices stabilizing and beginning to turn up.

Though the evidence that monetary stimulus produces increased investment and a business upturn is patchy, its effects on financial markets and asset prices are very easy to document quickly.

The increase in some asset prices may, moreover, lead to a W shaped double dip recession.

Second, emerging countries must develop more effective macroeconomic frameworks, including better macro prudential regulation and a broader monetary policy framework that takes into account asset prices and financial market stability.

Asset prices stocks, commercial real estate, and even oil are, historically, at high levels around the world.

True, asset prices have recovered enough to help balance sheets, but probably not enough to help consumption.

Moreover, systemic risks potentially created during periods of booming asset prices escape the purview of macroprudential rules.

The recent recovery of asset prices from their March lows is in part justified by fundamentals, as the risks of global financial meltdown and depression have fallen and confidence has improved.

All that liquidity, they will argue, had to go somewhere. Its logical destination was the country with the deepest financial markets, the US, where it raised asset prices to unsustainable heights.

First, if growth did not recover and surprise on the upside (in which case high asset prices would be justified), eventually slow growth would dominate the levitational effects of liquidity and force asset prices lower, in line with weaker economic fundamentals.

True, easy money did help to restore equity prices, but it might also have created new asset bubbles.

In every case, these imbalances were fueled by easily identifiable periods of euphoria and sudden asset prices increases.

Finally, public purchases of domestic assets to stabilize asset prices and net capital flows will become increasingly common.

In theory, when interest rates go up, there is reason to believe that asset prices will go down.

The purchase and sale of foreign currency or gold as a financial asset

Strong economic performance reflects strong domestic demand in the US, owing to low borrowing costs and rising asset prices.

Rather than defend that theory, Cochrane admits that asset prices move more than reasonable expectations of future cash flows.

This has meant either a decline in asset prices quoted in dollars or in dollars quoted in other currencies.

The state affects asset prices indirectly through its influence on inflation, interest rates, and the strength of the currency.

In the second mode, asset prices fall because investors recognize that they should never have been as high as they were, or that future productivity growth is likely to be lower and interest rates higher. Either way, current asset prices are no longer warranted.

But, while risk aversion and volatility were falling and asset prices were rising, economic growth remained sluggish throughout the world.

Despite a recovery in asset prices in many countries and the deceleration of negative growth, unemployment is high and rising.

One oft heard justification for high asset prices is that real (inflation adjusted) long term interest rates are very low.

Europe, too, will get a bloody nose if it keeps trying to artificially prop up asset prices in the periphery.

But our point is that powerful forces that drive up asset prices may be unleashed even without massive liquidity inflows.