Are stocks a hedge against inflation? International evidence using a long-run approach

A large body of evidence indicates that the stock market tends to perform poorly during inflationary time periods. However, these results are mostly obtained from models structured to estimate the short-run relationships between stock returns and inflation. In this paper, we use a reduced-form approach and recent advances in the theory of cointegration to explore the international evidence on the relationship between stock prices and goods prices. This approach allows us to test if stocks maintain their value relative to goods prices and whether these response patterns depend on the source of inflation shocks. For most of the countries analysed, our results indicate that stocks do maintain their value relative to movements in overall price indexes and this conclusion generally does not depend on whether the source of the inflation shock is from the real or monetary sector. One notable exception is that stocks do not maintain their value relative to goods price following real output shocks in the US. (JEL G15, E44). (C) 1997 Elsevier Science Ltd.