MONEY, INFLATION, AND STOCK RETURNS IN THE PACIFIC BASIN MARKETS
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This study examines the relationship betlleen stock returns and i11flatio11 in Japan, South Korea, and Taillan. Stock retums in these Poc(ftc Basin morkets are found robe related negatilely to inflation. A Vector Autoregressive (VA R) modelling technique is employed to delineote the larious channels of influence in a system with i1iflation, stock returns, money supply, production, and golernment dejlcits. The.findings support the (//~~ument that the nega- ti1•e relationship bet11·ee11 stock ret11ms and inf lation in all three 111arket is spurious, caused by the counter cyclical 111onetary policy. /11 addition, only Japan appears to moneti::,e its deficits that further rei1~forces the effects of the counter cyclicol policy.
Abstract
This study examines the relationship betlleen stock returns and i11flatio11 in Japan, South Korea, and Taillan. Stock retums in these Poc(ftc Basin morkets are found robe related negatilely to inflation. A Vector Autoregressive (VA R) modelling technique is employed to delineote the larious channels of influence in a system with i1iflation, stock returns, money supply, production, and golernment dejlcits. The.findings support the (//~~ument that the nega- ti1•e relationship bet11·ee11 stock ret11ms and inf lation in all three 111arket is spurious, caused by the counter cyclical 111onetary policy. /11 addition, only Japan appears to moneti::,e its deficits that further rei1~forces the effects of the counter cyclicol policy.