Review of Quantitative Finance and Accounting

, Volume 21, Issue 3, pp 207–231 | Cite as

Asset Returns and Inflation in Response to Supply, Monetary, and Fiscal Disturbances

  • Bong-Soo Lee
Article

Abstract

This paper identifies sources of asset returns (stock returns and interest rates) and inflation relations. We find that the relation between asset returns and inflation is driven by three types of disturbances to the economy. We interpret them as due to supply disturbances and two types of demand—monetary and fiscal—disturbances. In post-war U.S. data, supply and fiscal disturbances drive a negative stock return-inflation relation, whereas monetary disturbances generate a positive stock return-inflation relation. However, all three types of disturbances generate a negative interest rate-inflation relation. Depending on the interaction of the three types of shocks, we observe different correlations between asset returns and inflation in post- and pre-World War II U.S. data.

asset returns inflation identification structural VAR 

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Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Bong-Soo Lee
    • 1
  1. 1.Department of Finance, Bauer College of BusinessUniversity of HoustonHoustonUSA

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