Good inflation, bad inflation: implications for risky asset prices

Diego Bonelli, Berardino Palazzo and Ram Yamarthy
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Diego Bonelli: BANCO DE ESPAÑA
Berardino Palazzo: FEDERAL RESERVE BOARD OF GOVERNORS
Ram Yamarthy: FEDERAL RESERVE BOARD OF GOVERNORS

No 2525, Working Papers from Banco de España

Abstract: Using inflation swap prices, we study how changes in expected inflation affect firm-level credit spreads and equity returns, and uncover evidence of a time-varying inflation sensitivity. In times of “good inflation,” when inflation news is perceived by investors to be more positively correlated with real economic growth, movements in expected inflation substantially reduce corporate credit spreads and raise equity valuations. Meanwhile in times of “bad inflation,” these effects are attenuated and the opposite may even occur. These dynamics naturally arise in an equilibrium asset pricing model with a time-varying inflation-growth covariance and persistent macroeconomic expectations.

Keywords: inflation sensitivity; time variation; asset prices; stock-bond correlation (search for similar items in EconPapers)
JEL-codes: E31 E44 G12 (search for similar items in EconPapers)
Pages: 93 pages
Date: 2025-05
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2525

DOI: 10.53479/39905

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