Asset prices do appear somewhat correlated with volatility associated with the real economy and inflation. For example, equity valuations for U.S. corporations increased more in the past twenty years than in the two decades prior to the Great Moderation. The price-earnings ratio for S&P 500 firms averaged 14 from 1960 to 1984 and rose to an average of 18 from 1985 to 2006.
In addition, term premiums on long-term U.S. Treasury securities are estimated to have declined substantially since the late 1980s. 4 Moreover, this  4  Kim, Don H. and Jonathan H. Wright (2005), “An Arbitrage-Free Three-Factor Term Structure Model and the Recent Behavior of Long-Term Yields and Distant-Horizon Forward Rates,” FEDS 2005-33.