Events at CERGE-EI

Chi Hyun Kim, Ph.D.

Humboldt University of Berlin, Germany

Authors: Chi Hyun Kim, Lorenzo Ranaldi and Moritz Schularick

Abstract: We examine the relationship between inflation surprises and asset returns across 18 advanced economies from 1870 to 2023 using newly constructed historical inflation surprise data. We document that stocks, housing, and government bond returns decline persistently following unexpected inflation increases, with this relationship intensifying after the 1970s when central banks began responding more aggressively to inflation. Leveraging long-run variation across exchange rate regimes, we test monetary policy responses as the key channel explaining the inflation-asset return nexus. Under fixed exchange rates with open capital accounts, where monetary policy is constrained, real asset returns decline substantially less. Consistent with this mechanism, real dividends and profits fall sharply after inflation surprises in floating regimes but remain stable in pegged countries. These findings demonstrate that inflation affects asset returns primarily through the proxy effect, as monetary tightening depresses future economic activity and cashflows.

Full Text: Inflation Surprises and Asset Returns: a Macrohistory Perspective