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Expected inflation, expected stock returns, and money illusion: What can we learn from survey expectations?

  • Schmeling, Maik
  • Schrimpf, Andreas

We show empirically that survey-based measures of expected inflation are significant and strong predictors of future aggregate stock returns in several industrialized countries both in-sample and out-of-sample. Empirically discriminating between competing sources of this return predictability by virtue of a comprehensive set of expectations data, we find that money illusion seems to be the driving force behind our results. Another popular hypothesis - inflation as a proxy for aggregate risk aversion - is not supported by thedata.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 55 (2011)
Issue (Month): 5 (June)
Pages: 702-719

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Handle: RePEc:eee:eecrev:v:55:y:2011:i:5:p:702-719
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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