Abstract
This paper hypothesizes that the relation between stock returns and inflation is caused by the equilibrium process in the monetary sector. More importantly, these relations vary over time in a systematic manner depending on the influence of money demand and supply factors. Post-war evidence from the United States, Canada, the United Kingdom and Germany indicates that the negative stock return-inflation relations are caused by money demand and counter-cyclical money supply effects. On the other hand, pro-cyclical movements in money, inflation, and stock prices during the 1930's lead to relations which are either positive or insignificant.
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