Inflation and asset returns |
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| Affiliation: | 1. Department of Economics, University of Adelaide, Adelaide, S.A. 5005, Australia;2. Department of Finance, Carlson School of Management, University of Minnesota, 321, 19th Avenue South, Minneapolis, MN 55455, USA;3. Department of Economics, University of Texas at Austin, Austin, TX 78712, USA;4. Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101, USA;1. Department of Banking and Finance, Cankaya University, Ankara, Turkey;2. Department of Management, Bahcesehir University, Istanbul, Turkey;3. Department of Management, Isik University, Istanbul, Turkey;1. School of Economics and Management, Open University of Cyprus, 2220, Latsia, Cyprus;2. Department of Economics, University of Pretoria, Pretoria, 0002, South Africa;3. College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE, 68182, USA;4. School of Business and Economics, Loughborough University, Leicestershire, LE11 3TU, UK;1. Webster Vienna Private University, Department of Business and Management, Praterstrasse 23, 1020, Vienna, Austria;2. Department of Economics, Faculty of Economic and Management Sciences, University of Pretoria, 0002, South Africa;3. Faculty of Management, IBS Hyderabad, IFHE University, Donthanapally Shankarapalli Road, Hyderabad, Andhra Pradesh 501203, India |
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| Abstract: | Sustained inflation is detrimental to long-run growth and the financial system. A recent theoretical literature suggests that high inflation implies low real returns on assets. These low returns exacerbate informational frictions, interfering with the functioning of financial markets and the allocation of investment. We investigate the plausibility of an inverse relationship between inflation and real returns. Inflation and nominal equity returns are negatively correlated or uncorrelated for all low-to-moderate inflation economies examined. Safe nominal rates of return and inflation are only weakly positively correlated. However, for high inflation economies inflation and nominal returns are strongly positively correlated. |
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