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Inflation and Stock Prices: No Illusion
Author(s) -
WEI CHAO
Publication year - 2010
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2009.00289.x
Subject(s) - economics , illusion , inflation (cosmology) , stock (firearms) , dividend , econometrics , shock (circulatory) , rational expectations , keynesian economics , monetary economics , psychology , physics , cognitive psychology , finance , engineering , mechanical engineering , medicine , theoretical physics
Campbell and Vuolteenaho (2004) use VAR results to advocate inflation illusion as the explanation for the positive association between inflation and dividend yields. Using a structural approach, we find that a fully rational dynamic general equilibrium model can generate a positive correlation between dividend yields and inflation as observed in the data. The paper describes a channel by which the technology shock moves both inflation and dividend yields in the same direction, resulting in a positive correlation between the two.