Financial Market Volatility and the World-wide Fall in Inflation

David Gruen

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Inflation in the 1990s in most industrial countries is lower and less variable than at any time in the past quarter of a century. Economic theory predicts that, other things equal, this decline in inflation variability should lead to less volatility in both bond and foreign exchange markets. The paper tests these theoretical predictions and finds some evidence that lower inflation variability leads to less volatility of bond yields, but almost no evidence that it leads to lower volatility of floating exchange rates.

Date: 1995-12
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