ARE STOCKS A HEDGE AGAINST INFLATION - INTERNATIONAL EVIDENCE USING ALONG-RUN APPROACH

A large body of evidence indicates that the stock market tends to perf orm poorly during inflationary time periods. However, these results ar e mostly obtained from models structured to estimate the short-run rel ationships between stock returns and inflation. In this paper, we use a reduced-form approach and recent advances in the theory of cointegra tion to explore the international evidence on the relationship between stock prices and goods prices. This approach allows us to test if sto cks maintain their value relative to goods prices and whether these re sponse patterns depend on the source of inflation shocks. For most of the countries analysed, our results indicate that stocks do maintain t heir value relative to movements in overall price indexes and this con clusion generally does not depend on whether the source of the inflati on shock is from the real or monetary sector. One notable exception is that stocks do not maintain their value relative to goods price follo wing real output shocks in the US. (JEL G15, E44). (C) 1997 Elsevier S cience Ltd.