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Monetary Policy Credibility and the Comovement between Stock Returns and Inflation

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  • Eurilton Araújo

Abstract

Empirical evidence suggests that the magnitude of the negative comovement between real stock returns and inflation declined during the Great Moderation in the U.S. To understand the role of monetary policy credibility in this change, I study optimal monetary policy under loose commitment in a macroeconomic model in which stock price movements have direct implications for business cycles. In line with the data, a calibration of the model featuring a significant degree of credibility can replicate the weakening of the negative relationship between real stock returns and inflation in the Great Moderation era.

Suggested Citation

  • Eurilton Araújo, 2016. "Monetary Policy Credibility and the Comovement between Stock Returns and Inflation," Working Papers Series 449, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:449
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    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/wps449.pdf
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