Inflation and Stock Prices: No Illusion

Chao Wei

Journal of Money, Credit and Banking, 2010, vol. 42, issue 2-3, 325-345

Abstract: Campbell and Vuolteenaho (2004) use VAR results to advocate inflation illusion as the explanation for the positive association between inflation and dividend yields. Using a structural approach, we find that a fully rational dynamic general equilibrium model can generate a positive correlation between dividend yields and inflation as observed in the data. The paper describes a channel by which the technology shock moves both inflation and dividend yields in the same direction, resulting in a positive correlation between the two. Copyright (c) 2010 The Ohio State University.

Date: 2010
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Working Paper: Inflation and Stock Prices: No Illusion (2007)
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