Stochastic inflation and the equity premium
AbstractThe effects of stochastic inflation on equity prices and the equity premium are studied in a pure-endowment asset-pricing model with a cash-in-advance constraint. Stochastic inflation affects the equity premium through two channels: the assessment of an inflation tax and the presence of an inflation premium. Real and monetary versions of the model are simulated and the comparative dynamic results corroborate the conclusion that inflation has quantitatively important effects. ; The other important result is that the equity premium in the real version of a modelâa continuous state-space generalization of Mehra and Prescott (1985)âand the monetary model is very sensitive to the conditional variance of endowment growth. When the standard deviation of endowment growth is increased from 3.49 percent (the estimated value) to 5.59 percent, the real model can generate an equity premium of 2.8 percent in the range of the risk aversion parameters considered by Mehra and Prescott. The monetary model displays similar sensitivity and can generate an equity premium of 5.81 percent.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 24 (1989)
Issue (Month): 2 (September)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505566
Other versions of this item:
- Pamela Labadie, 1989. "Stochastic inflation and the equity premium," Discussion Paper / Institute for Empirical Macroeconomics 12, Federal Reserve Bank of Minneapolis.
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.