Abstract
This study investigates the anomalous relationship between real stock returns and inflation. Specifically, we investigate hypotheses that claim the proxy relationship between inflation and expected real output is driven by the practice of debt monetization and/or countercyclical monetary policy carried out by the central bank. Using a rational expectations approach to the determination of stock returns, the equilibrium process in the monetary sector is not found to be a consistent explanation for the anomalous relationship. Also, the results do not favor the hypothesis that debt monetization lies behind the performance of the stock market during inflationary time periods.
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