Abstract
This research examines the relations between expected inflation and real returns on stocks for six industrialized countries during the pre-World War II period. Negative correlations are found, consistent with the findings of other researchers for the postwar period. Fama's (1981) proxy theory attempts to explain the negative relation, based on his finding of a strong positive correlation between real returns and real output growth for the postwar period. This research finds the real return/output growth correlation to be zero for the U.S. and France, and negative for Germany, for the pre-1914 period. (JEL E31, G12, N10, N20)
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