Working Paper: NBER ID: w30169
Authors: Xiang Fang; Yang Liu; Nikolai Roussanov
Abstract: Do “real” assets protect against inflation? Core inflation betas of stocks are negative while energy betas are positive; currencies, commodities, and real estate also mostly hedge against energy inflation but not core. These hedging properties are reflected in the prices of inflation risks: only core inflation carries a negative risk premium, and its magnitude is consistent both within and across asset classes, uniquely among macroeconomic risk factors. While high core inflation tends to be followed by low real output, consumption, and dividend payouts, it impacts asset prices through both cash-flow and discount rate channels. The relative contribution of core and energy changes over time, helping explain the time-varying correlation between stock and bond returns. A two-sector New Keynesian model qualitatively accounts for these facts and implies that the changing stock-bond correlation can be attributed to the shifting importance of supply and demand shocks in driving energy inflation over time.
Keywords: core inflation; energy inflation; asset pricing; risk premium; New Keynesian model
JEL Codes: E31; E44; E5; F31; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| core inflation (E31) | asset prices (G19) |
| energy inflation (Q41) | asset prices (G19) |
| core inflation (E31) | lower asset returns (G19) |
| supply and demand shocks (E39) | energy inflation (Q41) |
| energy inflation (Q41) | core inflation (E31) |
| core inflation (E31) | price of risk (G19) |
| energy inflation (Q41) | price of risk (G19) |
| shifting importance of shocks (E32) | correlation between stock and bond returns (G12) |