<p>My understanding of the effect of easing monetary policy on asset prices is that it can work through a more direct channel. </p>

<p>If markets are efficient and risk neutral then generally the value of an asset <span class="math-container">$i$</span> is equal to the net present value of the expected cash flows generated by that project:
<span class="math-container">$$ P_i = NPV(i) = \sum_{\tau=0}^{\infty} \frac{E[C_\tau]}{\Pi_{\ell=0}^{\tau}(1+r_{\ell})} $$</span>
Monetary policy directly lowers the denominator of the the fraction in the sum, so it raises the value of the sum. In English, by reducing the rate at which we discount future investment the present value of the asset's cash flows become more valuable. If monetary policy can also improve the economy more generally, it can also increase the expected size of the cash flows, further increasing the value of the asset (it also raises the numerator). </p>

CC BY-SA 4.0
2019-09-19T05:56:37.140Z
I'm not sure this argument is that conving by itself because an improving economy also causes (regular) inflation. So it depends if you want to call any nominal price increase of assets, "asset price inflation". If asset prices rise in nominal terms, but still lower than the CPI, is that still "asset price inflation"? (Compared to "the average stuff" in the economy, the assets are actually cheaper now.)
fantastic peace and prosperity
CC BY-SA 4.0
2019-09-19T06:03:49.033Z
"Asset inflation occurs when the prices of financial assets are rising
even though they are already above their intrinsic or underlying value. Hence, to establish asset inflation, the intrinsic value of equities and houses must be first determined." https://www.bis.org/publ/confp05n.pdf
fantastic peace and prosperity
CC BY-SA 4.0
2019-09-17T14:17:09.850Z
2019-09-17T18:40:59.537Z
2019-09-17T18:40:59.537Z
BKay
<p>My macroeconomics professor told the following:
A decrease in interest rate causes that consumers rather spend their money on investments (stocks, houses) than put the money on the bank, and the increase in demand for stocks and houses causes asset price inflation in return.</p>

<p>However, if I try to search for a scholarly source saying the same thing, I cannot find anything. Is the above reasoning a solid one?</p>

<p>Thank you very much in advance!</p>

CC BY-SA 4.0
2019-09-19T06:23:32.637Z
Frankly "asset price inflation" seems to mean different things to different people. So the statement is rather trivially true, or not true just with those assumptions, depending on what is meant by "asset price inflation".
fantastic peace and prosperity
CC BY-SA 4.0
2019-09-19T06:54:46.930Z
Under the most trivial interpretation of that statement, 
"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." https://www.jstor.org/stable/27561599 It's what BKay's answer details.
fantastic peace and prosperity
CC BY-SA 4.0
2019-09-19T09:41:46.177Z
As for other meanings of "asset price inflation" see https://economics.stackexchange.com/questions/31942/is-there-a-widely-accepted-definition-of-asset-price-inflation
fantastic peace and prosperity
<monetary-policy><interest-rate>
The effect of Monetary Policy on Asset Price Inflation
Rick
# The effect of Monetary Policy on Asset Price Inflation

(Asked by: username_0 on 2019-09-17)

My macroeconomics professor told the following:
A decrease in interest rate causes that consumers rather spend their money on investments (stocks, houses) than put the money on the bank, and the increase in demand for stocks and houses causes asset price inflation in return.

However, if I try to search for a scholarly source saying the same thing, I cannot find anything. Is the above reasoning a solid one?

Thank you very much in advance!

**Tags:** monetary-policy, interest-rate

> **Comments:**
> **username_1**: Frankly "asset price inflation" seems to mean different things to different people. So the statement is rather trivially true, or not true just with those assumptions, depending on what is meant by "asset price inflation".  
> **username_1**: Under the most trivial interpretation of that statement,  "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." https://www.jstor.org/stable/27561599 It's what username_2's answer details.  
> **username_1**: As for other meanings of "asset price inflation" see https://economics.stackexchange.com/questions/31942/is-there-a-widely-accepted-definition-of-asset-price-inflation  

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## 1 answers

### Answer by username_2 on 2019-09-17. Score: 1

My understanding of the effect of easing monetary policy on asset prices is that it can work through a more direct channel.

If markets are efficient and risk neutral then generally the value of an asset $i$ is equal to the net present value of the expected cash flows generated by that project:
$$ P\_i = NPV(i) = \sum\_{\tau=0}^{\infty} \frac{E[C\_\tau]}{\Pi\_{\ell=0}^{\tau}(1+r\_{\ell})} $$
Monetary policy directly lowers the denominator of the the fraction in the sum, so it raises the value of the sum. In English, by reducing the rate at which we discount future investment the present value of the asset's cash flows become more valuable. If monetary policy can also improve the economy more generally, it can also increase the expected size of the cash flows, further increasing the value of the asset (it also raises the numerator).

> **Comments:**
> **username_1**: I'm not sure this argument is that conving by itself because an improving economy also causes (regular) inflation. So it depends if you want to call any nominal price increase of assets, "asset price inflation". If asset prices rise in nominal terms, but still lower than the CPI, is that still "asset price inflation"? (Compared to "the average stuff" in the economy, the assets are actually cheaper now.)  
> **username_1**: "Asset inflation occurs when the prices of financial assets are rising even though they are already above their intrinsic or underlying value. Hence, to establish asset inflation, the intrinsic value of equities and houses must be first determined." https://www.bis.org/publ/confp05n.pdf  

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