Chi Hyun Kim, Humboldt University of Berlin

"Inflation surprises and asset returns: a macrohistory perspective"

Abstract

We examine the relationship between inflation surprises and asset returns across 18 advanced economies from 1870 to 2023 using newly constructed historical inflation surprise data. We document that stocks, housing, and government bond returns decline persistently following an unexpected rise in inflation, with this relationship intensifying after the 1970s when central banks began responding more aggressively to inflation.

Exploiting the trilemma of international finance, we identify monetary policy as the key driver of this persistent decline. Under fixed exchange rates with open capital accounts, where monetary policy is constrained, asset returns decline substantially less, and real dividends, profits and rents remain stable. Inflation depresses asset returns primarily because monetary tightenings weaken future activity and cash flows - a policy-driven proxy effect. The demand or supply origin of the inflation surprise matters only on impact and cannot explain the persistent decline. Together, the two channels account for the entire five-year decline in equity returns.

Co-authored with Lorenzo Ranaldi and Moritz Schularick.

For more information about Chi Hyun Kim and her interesting work - link to her website.

Contact person: Brigitte Hochmuth