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Annual Review of Financial Economics

Volume 15, 2023

Inflation and Asset Returns

Abstract

The past half-century has seen major shifts in inflation expectations, how inflation comoves with the business cycle, and how stocks comove with Treasury bonds. Against this backdrop, we review the economic channels and empirical evidence on how inflation is priced in financial markets. Not all inflation episodes are created equal. Using a New Keynesian model, we show how “good” inflation can be linked to demand shocks and “bad” inflation to cost-push shocks driving the economy. We then discuss asset pricing implications of “good” and “bad” inflation. We conclude by providing an outlook for inflation risk premia in the world of newly rising inflation.

Keyword(s): bond return predictability, inflation, JEL E43, JEL E52, JEL E58, monetary policy, risk premia, stagflation
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/content/journals/10.1146/annurev-financial-110921-104726
2023-11-01
2024-04-29
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/content/journals/10.1146/annurev-financial-110921-104726
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Inflation and Asset Returns
Annual Review of Financial Economics 15, 433 (2023); https://doi.org/10.1146/annurev-financial-110921-104726
/content/journals/10.1146/annurev-financial-110921-104726
/content/journals/10.1146/annurev-financial-110921-104726
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  • Article Type: Review Article

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