Real Activity, Inflation, Stock Returns, and Monetary Policy

Kwangwoo Park and Ronald Ratti

The Financial Review, 2000, vol. 35, issue 2, 59-77

Abstract: We find that contractionary monetary policy shocks generate statistically significant movements in inflation and expected real stock returns, and that these movements go in opposite directions. Since positive shocks to output precipitate monetary tightening, we argue that the countercyclical monetary policy process is important in explaining the negative correlation between inflation and stock returns. Examining the 1979-82 period, we find that monetary policy tightens significantly in response to positive shocks to inflation, and that the impact of monetary policy shocks on stock returns is negative and volatile. Therefore, we see evidence that an "anticipated policy" hypothesis is at work. Copyright 2000 by MIT Press.

Date: 2000
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