I would like to thank Michael Bradley, Brett Rayner, Tara Sinclair, Roberto Samaniego, Herman Stekler, Thomas Tallarini, Anthony Yezer, two anonymous referees, and seminar participants at GWU, FDIC, Philadelphia Fed, University of Maryland at College Park, and the SED 2007 annual meeting for comments and suggestions.
Inflation and Stock Prices: No Illusion
Version of Record online: 22 MAR 2010
© 2010 The Ohio State University
Journal of Money, Credit and Banking
Volume 42, Issue 2-3, pages 325–345, March - April 2010
How to Cite
WEI, C. (2010), Inflation and Stock Prices: No Illusion. Journal of Money, Credit and Banking, 42: 325–345. doi: 10.1111/j.1538-4616.2009.00289.x
- Issue online: 22 MAR 2010
- Version of Record online: 22 MAR 2010
- Received October 26, 2007; and accepted in revised form September 16, 2009.
- inflation illusion;
- dividend yield;
Campbell and Vuolteenaho (2004) use VAR results to advocate inflation illusion as the explanation for the positive association between inflation and dividend yields. Using a structural approach, we find that a fully rational dynamic general equilibrium model can generate a positive correlation between dividend yields and inflation as observed in the data. The paper describes a channel by which the technology shock moves both inflation and dividend yields in the same direction, resulting in a positive correlation between the two.