Whether one looks at trailing or forward price-to-earnings ratios, equity risk premiums, or option prices, there is little basis for arguing that markets show excessive optimism about future returns. Of course, in the equity markets there is always downside risk.
The Bank of Italy’s econometric model can give us some quantitative answers. According to our estimates, 1 almost half of the growth recorded is attributable to the improvement in the credit market: the strongly expansionary monetary policy stance has recently led to a reduction in the cost of capital and fostered more relaxed supply conditions.