Asset Pricing and Expected Inflation

This paper provides an equilibrium model in which expected real returns on common stocks are negatively related to expected inflation and money growth. It is shown that the fall in real wealth associated with an increase in expected inflation decreases the real rate of interest and the expected real rate of return of the market portfolio. The expected real rate of return of the market portfolio falls less, for a given increase in expected inflation, when the increase in expected inflation is caused by an increase in money growth rather than by a worsening of the investment opportunity set. The model has empirical implications for the effect of a change in expected inflation on the cross-sectional distribution of asset returns and can help to understand why assets whose return covaries positively with expected inflation may have lower expected returns. The model also agrees with explanations advanced by Fama [5] and Geske and Roll [10] for the negative relation between stock returns and inflation.     

COMMON STOCK RETURNS,EXPECTED INFLATION,AND THE RATIONAL EXPECTATIONS HYPOTHESIS

This paper provides empirical evidence that expected inflation has a cross-sectional impact on common stock returns. The study differs from others in that (a) the relation between stock returns and expected inflation is investigated in a two-factor asset pricing model, where the factors are the return on an equally weighted stock portfolio and the expected rate of inflation; (b) the estimation of the expected rate of inflation is based on the rational expectations hypothesis of Muth; and (c) a non-linear seemingly unrelated regression technique is employed to determine consistent and asymptotically efficient estimates. The joint hypothesis of the two-factor asset pricing model and rational expectations is not rejected in this study. It is found that the return on common stocks is significantly affected by expected inflation. Also stocks whose returns are positively correlated with expected inflation have lower expected returns.     

Money,interest, inflation and growth in Turkey

This paper estimates a two equation model of inflation and growth in Turkey over the period 1950–1977. Inflation is determined by the difference between the rates of change in nominal money supply and real money demand. The short-run growth function consists of an expectations augmented Phillips curve, to which a credit availability effect is added. Under Turkey's disequilibrium institutional interest rate and exchange control systems, the real supply of domestic credit is determined, in large part, by real money demand which is, in turn, influenced by the real deposit rate of interest. The central bank can use both the nominal money supply and the nominal deposit rate of interest as policy instruments for stabilisation purposes.     

A Clower constraint model of unbacked money

The stylized monetary facts — (1) money growth causes inflation, (2) inflation is bad, (3) money demand depends upon the nominal interest rate, (4) the real interest rate equals a parametrically fixed rate of time preference, and (5) investment depends upon the real interest rate — are produced in a Grandmont-Younes modified Clower constraint model of money. Inflation is distorting, but is no one's intertemporal rate of substitution. Inflation discourages trade, but not investment. As a by-product the Friedman hypothesis, that the optimal deflation equals the rate of time preference, is confirmed in the model.     

The term structures of equity and interest rates

This paper proposes a dynamic risk-based model capable of jointly explaining the term structure of interest rates, returns on the aggregate market, and the risk and return characteristics of value and growth stocks. Both the term structure of interest rates and returns on value and growth stocks convey information about how the representative investor values cash flows of different maturities. We model how the representative investor perceives risks of these cash flows by specifying a parsimonious stochastic discount factor for the economy. Shocks to dividend growth, the real interest rate, and expected inflation are priced, but shocks to the price of risk are not. Given reasonable assumptions for dividends and inflation, we show that the model can simultaneously account for the behavior of aggregate stock returns, an upward-sloping yield curve, the failure of the expectations hypothesis, and the poor performance of the capital asset pricing model.     

Optimum consumption and portfolio rules with money as an asset

This article generalizes Merton's optimum consumption and portfolio rules in continuous time by introducing money as a capital asset and allowing for uncertain inflation. Assuming that prices are log-normally distributed, a three-funds theorem is derived and the introduction of money is shown not to change the form of the standard inflation-adjusted CAPM but to change the market price of risk. The individual's consumption-portfolio problem is completely solved under uncertain inflation if his utility function is iso-elastic in its arguments. Comparative statics are used to assess the influence of changes in exogenous parameters on the individual's optimal rules.     

Recent developments in monetary theory

This paper surveys recent work in monetary theory, with primary emphasis on material that has appeared since the writing of Harry Johnson's 1962 survey. The discussion deals with the following topics: (1) the theory of money demand, with special attention to inventory approaches; (2) money, inflation and growth; (3) the welfare cost of inflation, the optimum quantity of money, and inflationary finance; (4) disequilibrium theory; (5) the general equilibrium approach to monetary theory; (6) the new microfoundations of money; and (7) rational expectations and the Phillips Curve.     

Adaptive expectations,rational expectations,and money demand in hyperinflation Germany

In the recent literature Sargent and Wallace (IER, June, 1973) have estimated the demand equation for money in hyperinflation under the restriction that the adaptive formula of Phillip Cagan yields rational inflation expectations in the sense of John Muth. The present paper finds evidence to reject for the Germany case the proposition that adaptive expectations are rational. The procedure employed is basically to overfit the stochastic representation for the inflation rate implied by the ‘adaptive-is-rational’ hypothesis. The paper also puts forward and applies a two-step procedure to estimate the important money demand elasticity in hyperinflation. The procedure returns reasonable results with large estimated standard errors.     

Inflation and Asset Returns in a Monetary Economy

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.     

A VARMA Analysis of the Causal Relations Among Stock Returns,Real Output,and Nominal Interest Rates

Previous research has documented a negative relation between common stock returns and inflation. Recently, Fama 3 and Geske and Roll 6 have argued that this relation results from a more fundamental one between real activity and expected inflation. Stock returns, they argue, signal changes in real activity, which in turn affect expected inflation. However, unlike Fama, Geske and Roll argue that changes in real activity result in changes in money supply growth, which in turn affect expected inflation. Empirical tests have analyzed separately each link in the proposed causal chain. In this article, we investigate simultaneously the relations among stock returns, real activity, inflation, and money supply changes using a vector autoregressive moving average (VARMA) model. Our empirical results strongly support Geske and Roll's reversed causality model.     

Asset price dynamics,inflation and sectoral composition of output: a dependent economy model

This article develops a dependent economy model that focuses on the interactions between inflation and asset price dynamics under a flexible exchange rate and rational expectation. We assume that money wage adjusts instantaneously to clear the labour market. The asset prices are represented by the Tobin’s q and exchange rate. Using this framework, we will examine implications of monetary policy, fiscal policy, tariff liberalization and exogenous capital flows for inflation and asset prices, which in turn determine the allocation of labour and the sectoral composition of output. The effects of different exogenous and policy-induced shocks critically depend on the difference in the speeds of adjustment in commodity price and asset prices and multiple cross effects generated by changes in these prices.     

Rules,discretion and reputation in a model of monetary policy

In a discretionary regime the monetary authority can print more money and create more inflation than people expect. But, although these inflation surprises can have some benefits, they cannot arise systematically in equilibrium when people understand the policymaker's incentives and form their expectations accordingly. Because the policymaker has the power to create inflation shocks ex post, the equilibrium growth rates of money and prices turn out to be higher than otherwise. Therefore, enforced commitments (rules) for monetary behavior can improve matters. Given the repeated interaction between the policymaker and the private agents, it is possible that reputational forces can substitute for formal rules. Here, we develop an example of a reputational equilibrium where the outcomes turn out to be weighted averages of those from discretion and those from the ideal rule. In particular, the rates of inflation and monetary growth look more like those under discretion when the discount rate is high.     

On the inherent stability of rationally adaptive expectations

This paper analyzes Cagan's model of hyperinflation under the assumption that the stochastic process generating the behavior of the money supply is such as to make adaptive expectations ‘rational,’ in the sense of Muth. The paper shows that when the coefficient of adjustment of expectations has the value implied by the assumption of adjustment of ‘rationality,’ the stability condition of Cagan's model is necessarily satisfied.     

Common stock returns,real activity,money, and inflation: Some international evidence

This paper tests whether the negative relationship between real stock returns and inflation in the United States is in fact proxying for a positive relationship between stock returns and real activity variables in six major industrial countries over 1966–1979. Consistent with Fama's ‘proxy-effect’ hypothesis, we document a negative relationship between inflation and real activity and a positive one between real stock returns and real activity variables. Real activity variables dominate money growth rates and expected and unexpected inflation in explaining real stock returns. A puzzling result that still remains is the positive role of money and the negative role of expected inflation in explaining these real stock returns in all major industrial countries.     

Why interest rates react to money announcements: An explanation from the foreign exchange market

When the Fed announces a money supply greater than had been expected, interest rates rise. Why? One explanation is that the market raises its estimate of the future rates of money growth and inflation, and bids up nominal interest rates. We offer contrary evidence: on such days the dollar appreciates, not depreciates. An alternative explanation is that the market perceives the change in the money stock as a transitory fluctuation that the Fed will reverse in the future. The anticipated future tightening raises today's real interest rate, causes a capital inflow, and appreciates the dollar, the result in fact observed.     

外汇市场、股票市场及预期退货膨胀对货币需求的影响

本文利用2005年7月到2012年12月的月度数据,使用菲利普斯-奥肯曲线计算预期通货膨胀率,将汇率、股票市场以及预期通货膨胀率纳入货币需求函数模型,通过协整检验、VEC模型以及VAR模型,研究了汇率、股市以及通胀预期对实际货币需求的影响,结果发现汇率、股市收益率以及通胀预期对实际货币需求的影响具有统计显著性,但是影响程度很小。     

A note on the neutrality of temporary monetary disturbances

In the rational expectations analysis of Lucas and Barro, the quantity of money is subject to random shocks that are specified to be unanticipated and permanent in character. The present note provides some simple examples of alternative money supply specifications that lead to non-neutrality of perceived temporary monetary growth through the channel of expected inflation. Subsequently, the discussion demonstrates that this non-neutrality is not robust to an alternative specification of private monetary behavior, the permanent balance model. The key difference is that the initial model involves commodity supply and demand which depend on current real balances while in the subsequent model these depend on permanent balances. Some final remarks are directed to the idea that the distinction between current and permanent balances in this simple model could be linked to alternative roles of money in more detailed, optimizing analyses.     

Why Money Growth Determines Inflation in the Long Run: Answering the Woodford Critique

Woodford argues that it is not appropriate to regard inflation in the steady state of New Keynesian models as determined by steady‐state money growth. Woodford instead argues that the intercept term in the monetary authority's interest rate policy rule determines steady‐state inflation. In this paper, I offer an alternative interpretation of steady‐state behavior, according to which it is appropriate to regard steady‐state inflation as determined by steady‐state money growth. The argument relies on traditional interpretations of the central bank's power in the long run and appeals to model properties that are common to textbook and New Keynesian analysis. According to this argument, the only way the central bank can control interest rates in the long run is via affecting inflation, and its only means available for determining inflation is by determining the money growth rate.     

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

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.     

近十年中国通货膨胀成因的实证分析

近年来,如何防范和治理通货膨胀已成为中国宏观经济领域亟需解决的一项重大课题,而治理通胀的关键在于对其形成原因的科学把握。本文选取CPI和PPI作为通货膨胀的衡量指标,以产出缺口、货币供应量、国际大宗商品价格、超额工资水平、资产价格、汇率水平六大因素作为解释变量,运用向量自回归(VAR)、脉冲响应和方差分解的方法,对2000-2011年中国通货膨胀的形成原因进行实证分析,得到了各项因素的作用大小、作用时滞和传导链条的顺序,最后提出了相应的政策建议。