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Stock returns and inflation: Further tests of the role of the central bank

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  • Ely, David P.
  • Robinson, Kenneth J.

Abstract

This study investigates the anomalous relationship between real stock returns and inflation. Specifically, we investigate hypotheses that claim the proxy relationship between inflation and expected real output is driven by the practice of debt monetization and/or countercyclical monetary policy carried out by the central bank. Using a rational expectations approach to the determination of stock returns, the equilibrium process in the monetary sector is not found to be a consistent explanation for the anomalous relationship. Also, the results do not favor the hypothesis that debt monetization lies behind the performance of the stock market during inflationary time periods.

Suggested Citation

  • Ely, David P. & Robinson, Kenneth J., 1992. "Stock returns and inflation: Further tests of the role of the central bank," Journal of Macroeconomics, Elsevier, vol. 14(3), pages 525-543.
    • Handle: RePEc:eee:jmacro:v:14:y:1992:i:3:p:525-543
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    Cited by:

    1. Ely, David P. & Robinson, Kenneth J., 1997. "Are stocks a hedge against inflation? International evidence using a long-run approach," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 141-167, February.
    2. Sirucek, Martin, 2013. "Vliv peněžní nabídky na akciové bubliny v Japonsku [The impact of money supply on japanesee stock bubbles]," MPRA Paper 62817, University Library of Munich, Germany, revised 2013.
    3. Hondroyiannis, George & Papapetrou, Evangelia, 2006. "Stock returns and inflation in Greece: A Markov switching approach," Review of Financial Economics, Elsevier, vol. 15(1), pages 76-94.
    4. Samer Al-Rjoub, 2005. "The adjustments of stock prices to information about inflation: evidence from MENA countries," Applied Economics Letters, Taylor & Francis Journals, vol. 12(14), pages 871-879.
    5. Peter Sellin, 2001. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(4), pages 491-541, September.
    6. Pierre Siklos & Ben Kwok, 1999. "Stock returns and inflation: a new test of competing hypotheses," Applied Financial Economics, Taylor & Francis Journals, vol. 9(6), pages 567-581.
    7. Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
    8. Širůček, Martin, 2015. "Kauzalní vztah peněžní nabídky a amerického akciového trhu [Money supply and US stock market causality]," MPRA Paper 66357, University Library of Munich, Germany, revised 30 Aug 2015.
    9. S. I. Spyrou, 2004. "Are stocks a good hedge against inflation? evidence from emerging markets," Applied Economics, Taylor & Francis Journals, vol. 36(1), pages 41-48.
    10. Nicole Davis & Ali Kutan, 2003. "Inflation and output as predictors of stock returns and volatility: international evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 13(9), pages 693-700.
    11. Lastrapes, W. D., 1998. "International evidence on equity prices, interest rates and money," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 377-406, June.
    12. Dikaios Tserkezos & Eleni Thanou, 2007. "Conventional Nonlinear Relationships between GDP, Inflation and Stock Market Returns. An Investigation for the Greek Economy," Working Papers 0731, University of Crete, Department of Economics.
    13. Anyiwe, Mercy Ada & Sunday Osahon Igbinedion, 2015. "Stock Returns, Inflation and the “Reverse Causality†Hypothesis: Evidence from Nigeria," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 4(1), pages 32-50, January.

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