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Asset Returns and Inflation in Response to Supply, Monetary, and Fiscal Disturbances

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  • Lee, Bong-Soo
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    Abstract

    This paper identifies sources of asset returns (stock returns and interest rates) and inflation relations. We find that the relation between asset returns and inflation is driven by three types of disturbances to the economy. We interpret them as due to supply disturbances and two types of demand--monetary and fiscal--disturbances. In post-war U.S. data, supply and fiscal disturbances drive a negative stock return-inflation relation, whereas monetary disturbances generate a positive stock return-inflation relation. However, all three types of disturbances generate a negative interest rate-inflation relation. Depending on the interaction of the three types of shocks, we observe different correlations between asset returns and inflation in post- and pre-World War II U.S. data. Copyright 2003 by Kluwer Academic Publishers

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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 21 (2003)
    Issue (Month): 3 (November)
    Pages: 207-31

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    Handle: RePEc:kap:rqfnac:v:21:y:2003:i:3:p:207-31

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

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    Cited by:
    1. Acker, Daniella & Duck, Nigel W., 2013. "Inflation illusion and the US dividend yield: Some further evidence," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 235-254.
    2. Lee, Bong Soo, 2010. "Stock returns and inflation revisited: An evaluation of the inflation illusion hypothesis," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1257-1273, June.
    3. Rushdi, Mustabshira & Kim, Jae H. & Silvapulle, Param, 2012. "ARDL bounds tests and robust inference for the long run relationship between real stock returns and inflation in Australia," Economic Modelling, Elsevier, vol. 29(3), pages 535-543.
    4. Oxman, Jeffrey, 2012. "Price inflation and stock returns," Economics Letters, Elsevier, vol. 116(3), pages 385-388.

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