Present Value Prices and the Real Rate of Interest - Financial Theory

Explore the foundations of financial theory in this lecture from Yale University's Financial Theory course. Delve into Irving Fisher's groundbreaking model of financial equilibrium, which integrates time and assets into the general equilibrium framework. Understand how Fisher drew parallels between trading goods across time periods and trading different goods within a single period. Examine the concept that assets like stocks and bonds derive their significance from future dividends. Learn how Fisher applied general equilibrium techniques to solve for interest rates, present value prices, asset prices, and allocations in financial markets. Discover Fisher's revolutionary insight that the real interest rate is a relative price determined by market participants' preferences and endowments, challenging long-held philosophical beliefs. Explore topics such as implications of general equilibrium, interest rates and stock prices, defining financial equilibrium, inflation and arbitrage, present value prices, and the distinction between real and nominal interest rates.