“Good” Inflation, “Bad” Inflation: Implications for Risky Asset Prices

Diego Bonelli, Berardino Palazzo and Ram S. Yamarthy
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Ram S. Yamarthy: https://www.federalreserve.gov/econres/ram-s-yamarthy.htm

No 2025-002, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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 can take place. These dynamics naturally arise in an equilibrium asset pricing model with a time-varying inflation-growth relationship 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: 72 p.
Date: 2025-01-06
New Economics Papers: this item is included in nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-02

DOI: 10.17016/FEDS.2025.002

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