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

Maik Schmeling and Andreas Schrimpf

European Economic Review, 2011, vol. 55, issue 5, 702-719

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. 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 thedata.

Keywords: Inflation; expectations; Money; illusion; Proxy; hypothesis; Return; predictability (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (40)

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Working Paper: Expected inflation, expected stock returns, and money illusion: What can we learn from survey expectations? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:55:y:2011:i:5:p:702-719

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