Discount‐rate variation is the central organizing question of current asset‐pricing research. I survey facts, theories, and applications. Previously, we thought returns were unpredictable, with variation in price‐dividend ratios due to variation in expected cashflows. Now it seems all price‐dividend variation corresponds to discount‐rate variation. We also thought that the cross‐section of expected returns came from the CAPM. Now we have a zoo of new factors. I categorize discount‐rate theories based on central ingredients and data sources. Incorporating discount‐rate variation affects finance applications, including portfolio theory, accounting, cost of capital, capital structure, compensation, and macroeconomics.

The new-Keynesian, Taylor rule theory of inflation determination relies on explosive dynamics. By raising interest rates in response to inflation, the Fed induces ever-larger inflation, unless inflation jumps to one particular value on each date. However, economics does not rule out explosive inflation, so inflation remains indeterminate. Attempts to fix this problem assume that the government will choose to blow up the economy if alternative equilibria emerge, by following policies we usually consider impossible. The Taylor rule is not identified without unrealistic assumptions. Thus, Taylor rule regressions do not show that the Fed moved from “passive” to “active” policy in 1980.