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Disinflation and the Stock Market: Third World Lessons for First World Monetary Policy

Anusha Chari and Peter Henry

No 31129, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: When policymakers implement a disinflation program directed at high inflation, the real dollar value of their country’s stock market index experiences a cumulative abnormal 12-month return of 48 percent in anticipation of the event. In contrast, the average cumulative abnormal 12-month return associated with disinflations directed at moderate inflation is negative 18 percent. The 66-percentage point difference between cumulative abnormal returns, along with descriptive evidence and case studies, suggests that unlike the swift eradication of past high inflations documented by Sargent (1982), the US will not experience a quick, low-cost transition from moderate inflation to the Fed’s two-percent target.

JEL-codes: E44 E52 E65 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-cba and nep-mon
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