Stock returns and inflation: The role of the monetary sector

Abstract This paper hypothesizes that the relation between stock returns and inflation is caused by the equilibrium process in the monetary sector. More importantly, these relations vary over time in a systematic manner depending on the influence of money demand and supply factors. Post-war evidence from the United States, Canada, the United Kingdom and Germany indicates that the negative stock return-inflation relations are caused by money demand and counter-cyclical money supply effects. On the other hand, pro-cyclical movements in money, inflation, and stock prices during the 1930's lead to relations which are either positive or insignificant.

[1]  T. Day.  Real Stock Returns and Inflation , 1984 .

[2]  N. Bulent Gultekin,et al.  Stock Market Returns and Inflation: Evidence from Other Countries , 1983 .

[3]  C. Nelson.  Recursive Structure in U.S. Income, Prices, and Output , 1979, Journal of Political Economy.

[4]  Stephen F. LeRoy.  Nominal prices and interest rates in general equilibrium , 1984 .

[5]  F. Modigliani,et al.  INFLATION, RATIONAL VALUATION, AND THE MARKET , 1979 .

[6]  F. Black.  ACTIVE AND PASSIVE MONETARY POLICY IN A NEOCLASSICAL MODEL , 1972 .

[7]  Rendigs Fels,et al.  What Economics Is Most Important to Teach: The Hansen Committee Report , 1977 .

[8]  M. Friedman,et al.  A Monetary History of the United States , 1963 .

[9]  Michael J. Hamburger,et al.  Deficits, money and inflation , 1981 .

[10]  R. Barro.  Unanticipated Money Growth and Unemployment in the United States , 1979 .

[11]  Richard V. L. Cooper.  EFFICIENT CAPITAL MARKETS AND THE QUANTITY THEORY OF MONEY , 1974 .

[12]  G. Mandelker,et al.  THE “FISHER EFFECT” FOR RISKY ASSETS: AN EMPIRICAL INVESTIGATION , 1976 .

[13]  G. William Schwert,et al.  Asset returns and inflation , 1977 .

[14]  Christopher M. James,et al.  A VARMA Analysis of the Causal Relations among Stock Returns, Real Output, and Nominal Interest Rates , 1985 .

[15]  Michael R. Gibbons,et al.  A comparison of inflation forecasts , 1984 .

[16]  Richard Roll,et al.  The Fiscal and Monetary Linkage between Stock Returns and Inflation , 1983 .

[17]  E. Fama.  Inflation, Output, and Money , 1982 .

[18]  Michael S. Rozeff.  Money and Stock Prices , 1974 .

[19]  Richard S. Ruback,et al.  Effects of Nominal Contracting on Stock Returns , 1983, Journal of Political Economy.

[20]  C. Nelson,et al.  On testing the hypothesis that the real rate of interest is constant , 1977 .

[21]  A. Zellner.  An Efficient Method of Estimating Seemingly Unrelated Regressions and Tests for Aggregation Bias , 1962 .

[22]  I. Fisher,et al.  The theory of interest , 1956 .

[23]  J. D. Vinso,et al.  STOCK RETURNS, MONEY SUPPLY AND THE DIRECTION OF CAUSALITY , 1977 .

[24]  Bruno Solnik.  The Relation between Stock Prices and Inflationary Expectations: The International Evidence , 1983 .

[25]  E. Fama.  Stock Returns, Real Activity, Inflation, and Money , 1981 .

[26]  Frederic S. Mishkin.  Monetary Policy and Short-Term Interest Rates: An Efficient Markets-Rational Expectations Approach , 1981 .

[27]  Gwilym M. Jenkins,et al.  Time series analysis, forecasting and control , 1972 .

[28]  Charles R. Nelson,et al.  Inflation and Rates of Return on Common Stocks , 1976 .

[29]  P. Wachtel,et al.  Time variation in the relationship between inflation and interest rates , 1978 .

[30]  L. Summers.  Inflation and the Valuation of Corporate Equities , 1981 .

[31]  J. L. Bicksler,et al.  Capital asset prices versus time series models as predictors of inflation: The expected real rate of interest and market efficiency , 1975 .

[32]  J. Lintner.  INFLATION AND SECURITY RETURNS , 1975 .

[33]  Zvi Bodie,et al.  Common Stocks as a Hedge against Inflation , 1976 .