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JOURNAL OF APPLIED BUSINESS AND ECONOMICS

Inflation Targeting Regime and the Relationship Between Stock Returns and Inflation: New Evidence using the VAR Approach

Author(s): Unro Lee

Citation: Lee Unro, (2016)Inflation Targeting Regime and the Relationship Between Stock Returns and Inflation: New Evidence using the VAR Approach," Journal of Applied Business and Economics, Vol. 18, Iss. 7, pp. 79-92

Article Type: Research paper

Publisher: North American Business Press

Abstract:

Many industrialized and emerging countries have adopted inflation targeting monetary policy since 1990

to combat persistently high inflation rate. Based on the assertion that a unique and interesting

relationship between stock returns and inflation rate exists for inflation targeting countries, this study

investigates dynamic relationship between stock returns and inflation rate for a selected group of

countries that implemented inflation targeting policy in the 1990s – namely, Brazil, Canada, Chile,

Israel, South Korea, Sweden and the United Kingdom. It is found that changes in inflation rate precede

or Granger cause changes in real stock returns for most of these countries. This relationship implies that

forward-looking investors in inflation targeting countries are inclined to trade stocks based on

anticipated future economic events resulting from a change in current inflation rate.