This paper investigates the relation between common stock returns and inflation in twenty-six countries for the postwar period. Our results do not support the Fisher Hypothesis, which states that real rates of return on common stocks and expected inflation rates are independent and that nominal stock returns vary in one-to-one correspondence with expected inflation. There is a consistent lack of positive relation between stock returns and inflation in most of the countries.

Stock Market Returns and Inflation: Evidence from Other Countries

SUMMARY
Standard analysis of monetary policy effects on interest rates in terms of liquidity, income, and expectations effects is incomplete. After a change in monetary policy, substitution among securities will increase as time elapses and so reduce or eliminate financial effects caused by short-run financial market segmentation. Also, the standard expectations effect omits the transfer of income tax liability on that part of the interest payment representing a return of real capital. So a 1 percentage point increase in the expected inflation rate should increase the nominal interest rate by 1/(1 —τ) percentage points, τ being the marginal tax rate.

The financial and tax effects of monetary policy on interest rates

Inflation is a process of continuously rising prices, or equivalently, of a continuously falling value of money Its importance stems from the pervasive role played by money in a modern economy A continuously falling value of pins, or of refrigerators, or of potatoes would not be regarded as a major social problem, important though it might be for the people directly engaged in the production and sale of those goods The case of money is different precisely because the role that it plays in co-ordinating economic activity ensures that changes in its value over time impinge upon the well-being of everyone

Inflation: A Survey

https://www.federalreserve.gov/pubs/ifdp/1991/403/ifdp403.pdf

In search of the liquidity effect

A consensus has emerged among practitioners that the instrument of monetary policy ought to be the short-term interest rate, that policy should be focused on the control of inflation, and that inflation can be reduced by increasing short-term interest rates. At the center of this consensus is a rejection of the quantity theory. Such a rejection is a difficult step to take, given the mass of evidence linking money growth, inflation, and interest rates: increases in average rates of money growth are associated with equal increases in average inflation rates and interest rates. These observations need not rule out a constructive role for the use of short-term interest rates as a monetary instrument. One possibility is that increasing short-term rates in the face of increases in inflation is just an indirect way of reducing money growth: sell bonds and take money out of the system. Another possibility is that, while control of monetary aggregates is the key to low long-run average inflation rates, an interest-rate policy can improve the short-run behavior of interest rates and prices. The shortrun connections among money growth, inflation, and interest rates are very unreliable, so there is much room for improvement. These possibilities are surely worth exploring, but doing so requires new theory. The analysis needed to reconcile interest-rate policies with the evidence on which the quantity theory of money is grounded cannot be found in old textbook diagrams.

/pdf/interest-rates-and-inflation-4fwzb8ltiy.pdf

Interest Rates and Inflation

THE RELATIONSHIP BETWEEN the expected rate of change of prices and the level of interest rates enjoys special status in economic theory. The positive relationship hypothesized long ago by Irving Fisher is widely accepted by students of economic theory, while its existence for United States experiences has, it appears, yet to be conclusively demonstrated. The absence of measurement of the relationship seems, however, not to have detracted greatly from its theoretical acceptability. Empirical verification of price-expectations effects warrants more attention, not only to substantiate the theory but also as a guide in formulating and evaluating national economic policy. A combination of monetary and fiscal policies which brings about prolonged inflation should by doing so tend also to increase market interest rates. These interest rate increases have important implications for saving and investment behavior and for the demand for money. If we are to assess the importance of these effects, we need some idea of their magnitude and timing, and this paper attempts such an estimation. In the next section the theoretical formulation of the price-expectations effect will be reviewed, while section III presents new evidence on the effects for U.S. data, and section IV concludes the paper.

https://www.jstor.org/stable/info/2325796

Price‐expectations effects on interest rates

I. Introduction, 288. — II. Monetary changes, interest rates, and national income, 288. — III. Lag in effect of monetary policy, 291. — IV. Measurement of effects of monetary policy changes, 292.

The Lag in the Effect of Monetary Policy on Income and Interest Rates

Targets and indicators of monetary policy

Monetary authorities also tend to take for granted that an increase in the money stock lowers interest rates. From their vantage point, an increase in the money stock by way of an open-market purchase tends to lower market rates quickly, since purchasing securities raises their prices and lowers yields. Indeed, they rely on this relation in order to control rates. Accordingly, interest-rate movements are frequently viewed as indicators of recent monetary policy. Since the money/interest-rate relation is used in implementing monetary policy, it is particularly important that the monetary authorities know how the relation works. If the monetary authorities believed that they lower interest rates by increasing the money stock whereas this at first lowers and then later raises rates, the authorities' actions would work first toward and then against an interest-rate goal. Further, if interest rates are viewed as indicators of monetary policy, incorrect conclusions can easily follow if total effects are disregarded in favor of initial effects. The trouble with using interest rates as indicators of monetary policy is as follows: If income increases faster than money, interest rates will tend to rise, but if the income increase results from increases in the money stock, should monetary policy be called restrictive?

William E. Gibson

Papers

Price‐expectations effects on interest rates

The Lag in the Effect of Monetary Policy on Income and Interest Rates

Targets and indicators of monetary policy

Effects of money on interest rates

Effects of money on interest rates