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Is Disinflation Good for the Stock Market?

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  • Peter Blair Henry

    (Stanford University)

Abstract

The stock market appreciates by an average of 24 percent in real dollar terms when countries attempt to stabilize annual inflation rates that are greater than 40 percent. In contrast, the average market response is 0 when the pre-stabilization rate of inflation is less than 40 percent. These results suggest that the potential long-run benefits of stabilization may dominate short-run costs at high levels of inflation, but at low to moderate levels of inflation, benefits may be offset by costs in a present value sense. Stock market responses also help predict the change in inflation and output in the year following all 81 stabilization efforts. Copyright The American Finance Association 2002.

Suggested Citation

  • Peter Blair Henry, 2002. "Is Disinflation Good for the Stock Market?," Journal of Finance, American Finance Association, vol. 57(4), pages 1617-1648, August.
  • Handle: RePEc:bla:jfinan:v:57:y:2002:i:4:p:1617-1648
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    References listed on IDEAS

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    Cited by:

    1. Stanley Fischer & Ratna Sahay & Carlos A. Végh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
    2. Peter Blair Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 887-935, December.
    3. Gregoriou, Andros & Kontonikas, Alexandros, 2010. "The long-run relationship between stock prices and goods prices: New evidence from panel cointegration," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(2), pages 166-176, April.
    4. Chari, Anusha & Blair Henry, Peter, 2008. "Firm-specific information and the efficiency of investment," Journal of Financial Economics, Elsevier, vol. 87(3), pages 636-655, March.
    5. Peter Blair Henry, 2003. "Capital-Account Liberalization, the Cost of Capital, and Economic Growth," American Economic Review, American Economic Association, vol. 93(2), pages 91-96, May.
    6. Peter Blair Henry & Diego Sasson, 2008. "Capital Account Liberalization, Real Wages, and Productivity," NBER Working Papers 13880, National Bureau of Economic Research, Inc.
    7. Laeven, Luc & Tong, Hui, 2012. "US monetary shocks and global stock prices," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 530-547.
    8. Henry, Peter Blair & Sasson, Diego, 2009. "Capital Market Integration and Wages," Research Papers 2019, Stanford University, Graduate School of Business.
    9. Gregory Price, 2008. "NEA Presidential Address: Black Economists of the World You Cite!!," The Review of Black Political Economy, Springer;National Economic Association, vol. 35(1), pages 1-12, March.
    10. Serkan Arslanalp & Peter Blair Henry, 2002. "Debt Relief: What Do the Markets Think?," NBER Working Papers 9369, National Bureau of Economic Research, Inc.
    11. Serkan Arslanalp & Peter Blair Henry, 2005. "Is Debt Relief Efficient?," Journal of Finance, American Finance Association, vol. 60(2), pages 1017-1051, April.
    12. Christoffersen, Peter & Chung, Hyunchul & Errunza, Vihang, 2006. "Size matters: The impact of financial liberalization on individual firms," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1296-1318, December.
    13. Henry, Peter B., 2003. "Commentary on Bekaert, Harvey, and Lundblad's "Equity Market Liberalization in Emerging Equity Markets"," Research Papers 1783, Stanford University, Graduate School of Business.
    14. Anusha Chari & Peter Blair Henry, 2014. "Learning from the Doers: Developing Country Lessons for Advanced Economy Growth," American Economic Review, American Economic Association, vol. 104(5), pages 260-265, May.
    15. Taufiq Choudhry & Rene Coppe Pimentel, 2010. "Do Stock Returns Hedge against High and Low Inflation? Evidence from Brazilian Companies," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 2(2), pages 061-076, December.
    16. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers 07-004, Stanford Institute for Economic Policy Research.
    17. Kamran Khan & Israr Ahmed, 2015. "Impact of Stock Prices on Macroeconomic Variables: Evidence from Pakistan," KASBIT Business Journals, Khadim Ali Shah Bukhari Institute of Technology (KASBIT), vol. 8(1), pages 42-59, May.
    18. Anusha Chari & Peter Blair Henry & Diego Sasson, 2012. "Capital Market Integration and Wages," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 102-132, April.
    19. Khan, Muhammad Irfan Khan & Meher, Muhammad Ayub Khan Mehar & Syed, Syed Muhammad Kashif, 2013. "Impact of Inflation on Dividend Policy: Synchronization of Capital Gain and Interest Rate," MPRA Paper 51593, University Library of Munich, Germany, revised 04 Nov 2013.
    20. Peter Henry & Diego Sasson, 2009. "Capital Market Integration and Wages," Discussion Papers 08-028, Stanford Institute for Economic Policy Research.
    21. Ardagna, Silvia, 2009. "Financial markets' behavior around episodes of large changes in the fiscal stance," European Economic Review, Elsevier, vol. 53(1), pages 37-55, January.

    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F3 - International Economics - - International Finance

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