Document Type

Article

Publication Title

Global Business and Finance Review

ISSN

1088-6931

Volume

15

Issue

1

First Page

40

Last Page

52

Publication Date

Spring 4-1-2010

Abstract

Twenty six industrialized and emerging countries have adopted inflation targeting monetary policy since 1990 to combat persistently high inflation rate. This policy accords either the government and/or the central bank the authority to assign an explicit numerical target for inflation rate and implement an appropriate monetary policy to achieve its goal. This study investigates whether the adoption of inflation targeting strategy has affected the relationship between stock returns and inflation rate. Specifically, this study tests a hypothesis that, in an economy where inflation targeting has been adopted as a new monetary policy strategy, real stock returns should be sensitive to the change in inflation rate relative to its target. Both monthly and quarterly data for Australia, Canada, Chile, Israel, New Zealand, Sweden and United Kingdom are utilized in this study. The results are found to be somewhat mixed. A change in inflation rate relative to its target rate has a negative and statistically significant impact on real monthly stock returns for Chile, Israel, and Sweden and on real quarterly stock returns for only Chile and Israel.

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