Inflation, real stock returns, and monetary policy

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Abstract
The well-documented negative relation between real stock returns and inflation is studied using data from the post-war period. The relation is found to be unstable in the sense that it is negative before 1976 and after 1982 but positive in between these years. Evidence is presented that suggests that the instability may be the result of a shift from a counter-cyclical to a pro-cyclical monetary policy in 1976 and back to a counter-cyclical policy in 1982. The evidence is consistent with hypotheses by Fama and Marshall that the negative real stock return-inflation relation often observed is spurious.

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