Movements in the Equity Premium

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.