Matthias HAGMANN (HEC-University of Lausanne and FAME) Carlos LENZ (University of Basel, Department of Economics)
Abstract
We shed new light on the negative relationship between real stock returns or real interest rates and (i) post inflation, (ii) expected inflation, (iii) unexpected inflation and (iv) changes in expected inflation. Using the structural vector autoregression methodology, we propose a decomposition of those series into economically interpretable components driven by aggregate supply, real demand and money market shocks. Our empirical results support Fama’s ‘proxy hypothesis’ and the predictions of several general equilibrium models. Concerning the negative relation between the real rate of interest and inflation, we find that the Mundell-Tobin model and the explanation of Fama and Gibbons (1982) are not competitors: both add insight in their own way about the reasons for the negative correlation between those variables. However, the importance of the latter explanation decreased since the 1980’s.
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Publisher Info
Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number
rp118.
Find related papers by JEL classification: E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy G1 - Financial Economics - - General Financial Markets
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