Working Paper: NBER ID: w31129
Authors: Anusha Chari; Peter Blair Henry
Abstract: When policymakers implement a disinflation program directed at high inflation, the real dollar value of their country’s stock market index experiences a cumulative abnormal 12-month return of 48 percent in anticipation of the event. In contrast, the average cumulative abnormal 12-month return associated with disinflations directed at moderate inflation is negative 18 percent. The 66-percentage point difference between cumulative abnormal returns, along with descriptive evidence and case studies, suggests that unlike the swift eradication of past high inflations documented by Sargent (1982), the US will not experience a quick, low-cost transition from moderate inflation to the Fed’s two-percent target.
Keywords: No keywords provided
JEL Codes: E44; E52; E65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Disinflation aimed at high inflation (E31) | Positive stock market reaction (G10) |
| Disinflation aimed at moderate inflation (E31) | Negative stock market reaction (G19) |
| Disinflation aimed at high inflation (E31) | Cumulative abnormal return (CAR) of 48% (G17) |
| Disinflation aimed at moderate inflation (E31) | Cumulative abnormal return (CAR) of -18% (G17) |
| Disinflation programs (E31) | Stock market responses (G10) |