Working Paper: CEPR ID: DP1614
Authors: Fabio Canova; Gianni De Nicolo
Abstract: This paper analyses the empirical interdependence of asset returns, real activity and inflation from a multicountry and international point of view. We find that nominal stock returns are significantly related to inflation only in the United States, that the US term structure of interest rates predicts both domestic and foreign inflation rates while foreign term structures do not have this predictive power and that innovations in inflation and exchange rates induce insignificant responses of real and financial variables. An interpretation of the dynamics and some policy implications of the results are provided.
Keywords: Transmission; Business Cycles; International Stock Returns; Financial Markets
JEL Codes: C15; E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| innovations in nominal stock returns (G17) | real activity (E23) |
| innovations in nominal stock returns (G17) | inflation (E31) |
| slope of the term structure (E43) | inflation (E31) |
| slope of the term structure (E43) | real activity (E23) |
| inflation innovations (E31) | real activity (E23) |