Expected inflation, expected stock returns, and money illusion: What can we learn from survey expectations?

Maik Schmeling and Andreas Schrimpf

No 2008-036, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: We show empirically that survey-based measures of expected inflation are significant and strong predictors of future aggregate stock returns in several industrialized countries both in-sample and out-of-sample. By empirically discriminating between competing sources of this return predictability by virtue of a comprehensive set of expectations data, we find that money illusion seems to be the driving force behind our results. Another popular hypothesis - inflation as a proxy for aggregate risk aversion - is not supported by the data.

Keywords: Inflation expectations; money illusion; proxy hypothesis; stock returns (search for similar items in EconPapers)
JEL-codes: E44 G10 G12 (search for similar items in EconPapers)
Date: 2008
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Journal Article: Expected inflation, expected stock returns, and money illusion: What can we learn from survey expectations? (2011)
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