The Long-Run Relationship between Inflation and Real Stock Prices

Posted: 16 Sep 2002

See all articles by David E. Rapach

David E. Rapach

Seattle University, Albers School of Business and Economics

Abstract

In this paper, we use recent developments in the testing of long-run neutrality propositions to measure the long-run response of real stock prices to a permanent inflation shock for 16 individual industrialized countries. The estimation results provide considerable support for long-run inflation neutrality with respect to real stock prices. Ranges of plausible identifying parameter values are also consistent with a positive long-run real stock price response to a permanent inflation shock. There is little plausible evidence for a negative long-run real stock price response to a permanent inflation shock. Overall, our results indicate that inflation does not erode the long-run real value of stocks.

JEL Classification: C32, E31, G12

Suggested Citation

Rapach, David E., The Long-Run Relationship between Inflation and Real Stock Prices. Available at SSRN: https://ssrn.com/abstract=314081

David E. Rapach (Contact Author)

Seattle University, Albers School of Business and Economics ( email )

900 Broadway
Seattle, WA 98122
United States
206-296-5705 (Phone)

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