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Asset Returns and Inflation in Response to Supply, Monetary, and Fiscal Disturbances

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  • Lee, Bong-Soo

Abstract

This paper identifies sources of asset returns (stock returns and interest rates) and inflation relations. We find that the relation between asset returns and inflation is driven by three types of disturbances to the economy. We interpret them as due to supply disturbances and two types of demand--monetary and fiscal--disturbances. In post-war U.S. data, supply and fiscal disturbances drive a negative stock return-inflation relation, whereas monetary disturbances generate a positive stock return-inflation relation. However, all three types of disturbances generate a negative interest rate-inflation relation. Depending on the interaction of the three types of shocks, we observe different correlations between asset returns and inflation in post- and pre-World War II U.S. data. Copyright 2003 by Kluwer Academic Publishers

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  • Lee, Bong-Soo, 2003. "Asset Returns and Inflation in Response to Supply, Monetary, and Fiscal Disturbances," Review of Quantitative Finance and Accounting, Springer, vol. 21(3), pages 207-231, November.
    • Handle: RePEc:kap:rqfnac:v:21:y:2003:i:3:p:207-31
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    Cited by:

    1. Oxman, Jeffrey, 2012. "Price inflation and stock returns," Economics Letters, Elsevier, vol. 116(3), pages 385-388.
    2. Shu‐Chin Lin, 2009. "Inflation And Real Stock Returns Revisited," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 783-795, October.
    3. Pandey, Dharen Kumar & Lucey, Brian M. & Kumar, Satish, 2023. "Border disputes, conflicts, war, and financial markets research: A systematic review," Research in International Business and Finance, Elsevier, vol. 65(C).
    4. Prem Jain & Joshua Rosett, 2006. "Macroeconomic variables and the E/P ratio: Is inflation really positively associated with the E/P ratio?," Review of Quantitative Finance and Accounting, Springer, vol. 27(1), pages 5-26, August.
    5. Acker, Daniella & Duck, Nigel W., 2013. "Inflation illusion and the US dividend yield: Some further evidence," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 235-254.
    6. Matthias HAGMANN & Carlos LENZ, 2004. "Real Asset Returns and Components of Inflation: A Structural VAR Analysis," FAME Research Paper Series rp118, International Center for Financial Asset Management and Engineering.
    7. Lee, Bong Soo, 2010. "Stock returns and inflation revisited: An evaluation of the inflation illusion hypothesis," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1257-1273, June.
    8. Nikiforos Laopodis, 2010. "Dynamic linkages between monetary policy and the stock market," Review of Quantitative Finance and Accounting, Springer, vol. 35(3), pages 271-293, October.
    9. Rushdi, Mustabshira & Kim, Jae H. & Silvapulle, Param, 2012. "ARDL bounds tests and robust inference for the long run relationship between real stock returns and inflation in Australia," Economic Modelling, Elsevier, vol. 29(3), pages 535-543.
    10. Cedric L. Mbanga & Ali F. Darrat, 2016. "Fiscal policy and the US stock market," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 987-1002, November.

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