{
  "title": "Stock Returns and Inflation Redux: An Explanation from Monetary Policy in Advanced and Emerging Markets",
  "publication": "IMF Working Papers, August 20, 2021",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2021/08/20/stock-returns-and-inflation-redux-an-explanation-from-monetary-policy-in-advanced-and-463391",
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  "summary": "Classical theories of monetary economics predict that real stock returns are negatively correlated with inflation when monetary policy is countercyclical. Previous empirical studies mostly focus on a small group of developed countries or a few countries with hyperinflation.",
  "sections": [
    {
      "heading": "Summary of purpose and approach",
      "content": "- Examines the stock return-inflation relation under different monetary policy regimes and conditions using an expanded dataset of 71 economies.\n- Motivated by classical monetary economics prediction: real stock returns are negatively correlated with inflation when monetary policy is countercyclical.\n- Extends previous empirical work that mostly focused on a small group of developed countries or a few countries with hyperinflation."
    },
    {
      "heading": "Key empirical findings",
      "content": "- The stock return-inflation relation is partially driven by monetary policy.\n- If a country’s monetary authority conducts a more countercyclical monetary policy, the stock return-inflation relation becomes more negative.\n- The results differ by monetary policy framework:\n  - In exchange rate anchor countries, stock markets do not respond to monetary policy cyclicality.\n  - In inflation targeting countries, stock markets react more strongly to inflation.\n- Behavior within inflation targeters matters:\n  - Markets react to inflation and monetary policy cyclicality when central banks are able to control inflation within their target bands.\n  - Markets are sensitive to inflation dynamics when inflation is above the announced target bands.\n- When monetary policy is constrained by the Zero Lower Bound (ZLB), a structural break is introduced and real stock returns no longer respond to inflation and monetary policy cyclicality."
    },
    {
      "heading": "Subjects and keywords (as classified in the paper)",
      "content": "- Subjects: Central bank policy rate; Emerging and frontier financial markets; Financial institutions; Financial markets; Financial services; Inflation; Inflation targeting; Monetary policy; Prices; Stocks\n- Keywords: Central bank policy rate; countercyclical monetary policy; Emerging and frontier financial markets; Global; Inflation; Inflation targeting; inflation targeting country; market perception; monetary policy cyclicality; stock return-inflation relation; Stocks\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2021/08/20/stock-returns-and-inflation-redux-an-explanation-from-monetary-policy-in-advanced-and-463391"
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    "Authors: Zhongxia Zhang",
    "Published: August 20, 2021",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513586755.001",
    "Examines the stock return-inflation relation under different monetary policy regimes and conditions using an expanded dataset of 71 economies.",
    "Motivated by classical monetary economics prediction: real stock returns are negatively correlated with inflation when monetary policy is countercyclical.",
    "Extends previous empirical work that mostly focused on a small group of developed countries or a few countries with hyperinflation.",
    "The stock return-inflation relation is partially driven by monetary policy.",
    "If a country’s monetary authority conducts a more countercyclical monetary policy, the stock return-inflation relation becomes more negative.",
    "The results differ by monetary policy framework:",
    "Behavior within inflation targeters matters:",
    "When monetary policy is constrained by the Zero Lower Bound (ZLB), a structural break is introduced and real stock returns no longer respond to inflation and monetary policy cyclicality.",
    "Subjects: Central bank policy rate; Emerging and frontier financial markets; Financial institutions; Financial markets; Financial services; Inflation; Inflation targeting; Monetary policy; Prices; Stocks",
    "Keywords: Central bank policy rate; countercyclical monetary policy; Emerging and frontier financial markets; Global; Inflation; Inflation targeting; inflation targeting country; market perception; monetary policy cyclicality; stock return-inflation relation; Stocks",
    "**Working Paper**"
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