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Inflation and Asset Returns

Author

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  • Cieslak, Anna
  • Pflueger, Carolin

Abstract

The past half-century has seen major shifts in inflation expectations, how inflation comoves with the business cycle, and how stocks comove with Treasury bonds. Against this backdrop, we review the economic channels and empirical evidence on how inflation is priced in financial markets. Not all inflation episodes are created equal. Using in a New Keynesian model, we show how "good'' inflation can be linked to demand shocks and "bad'' inflation to supply shocks driving the economy. We then discuss asset pricing implications of "good" and "bad" inflation. We conclude by providing an outlook for inflation risk premia in the world of newly rising inflation.

Suggested Citation

  • Cieslak, Anna & Pflueger, Carolin, 2023. "Inflation and Asset Returns," CEPR Discussion Papers 18003, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18003
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    More about this item

    Keywords

    Inflation;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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