Inflation and Asset Returns in a Monetary Economy

Abstract

Postwar U.S. data are characterized by negative correlations between real equity returns and inflation and by positive correlations between real equity returns and money growth. These patterns are closely matched quantitatively by an equilibrium monetary asset pricing model. The model also implies negative correlations between expected asset returns and expected inflation, and it predicts that the inflation‐asset return correlation will be more strongly negative when inflation is generated by fluctuations in real economic activity than when it is generated by monetary fluctuations.

The implications of first-order risk aversion for asset market risk premiums

“…If S, denotes the exchange rate (dollazslyen), the budget constraint for the representative agent in units of consumption good x is ' The timing in this model differs from the transaction-cost models of Feenstra (1986) and Mazshall (1992) in that money provides transaction services in the period when it is acquired.…”

Capital Trading, Stock Trading, and the Inflation Tax on Equity

“…In our 1999 IMF working paper, we show that the results in Theorems 2 and 3 carry over to Marshall's (1992) shopping time model. The di®erence in the analysis is a change in the functional form of the consumer's marginal rate of substitution.…”

“…Since money plays several roles in the economy, however, several di®erent approaches to modeling the in°ation tax on returns are possible. Marshall (1992), for example, focuses on money's role as an additional asset that is a potential substitute for other securities. In this view, in°ation taxes the total return to money, which includes the transactions services provided by money.…”

“…We also examined the Modigliani Miller property that the competitive equilibrium in the 22 See Marshall (1992). economy will not change, if the¯rm¯nances a fraction of its investments with bonds rather than stocks.…”

Equity Returns, Inflation and Real Growth in Pakistan

“…10;2014 inflation. This negative association of inflation and equity returns is also empirically examined by many researchers (Cohn & Lessard, 1981;Geske & Roll, 1983;Gultekin, 1983;Marshall, 1992;Amihud, 1996;Engsted & Tanggaard, 2002). Fama (1981) suggested that in order to estimate the returns, income growth should also be considered.…”