Inflation and Asset Returns

Anna Cieslak and Carolin Pflueger ()
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Anna Cieslak: Fuqua School of Business, Duke University, Durham, North Carolina, USA
Carolin Pflueger: Harris School of Public Policy, University of Chicago, Chicago, Illinois, USA

Annual Review of Financial Economics, 2023, vol. 15, issue 1, 433-448

Abstract: The past half-century has seen major shifts in inflation expectations, how inflation comoves with the business cycle, and how stocks comove with Treasury bonds. Against this backdrop, we review the economic channels and empirical evidence on how inflation is priced in financial markets. Not all inflation episodes are created equal. Using a New Keynesian model, we show how “good” inflation can be linked to demand shocks and “bad” inflation to cost-push shocks driving the economy. We then discuss asset pricing implications of “good” and “bad” inflation. We conclude by providing an outlook for inflation risk premia in the world of newly rising inflation.

Keywords: inflation; risk premia; bond return predictability; stagflation; monetary policy (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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DOI: 10.1146/annurev-financial-110921-104726

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