Expected Inflation and Equity Prices: A Structural Econometric Approach / David S. Jones.

By:

Jones, David S

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0542.Publication details: Cambridge, Mass. National Bureau of Economic Research 1980.Description: 1 online resource: illustrations (black and white)Subject(s):

E - Macroeconomics and Monetary Economics

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: The purpose of the present paper is to investigate the effects of expected inflation on the general level of common stock prices using a structural rather than a reduced-form approach. To this end, an aggregative partial-equilibrium structural econometric model of the U.S. equity market is constructed using quarterly flow-of-funds data. The primary endogenous variable in this model is the Standard and Poor's Index of 500 Common Stock Prices, P. After passing several standard validation exercises he model is used to perform a number of simulation experiments designed o assess the impact of expected inflation on P. To anticipate, we find that increases in expected inflation depress current equity prices by bout the same amount as found in a related study of Modigliani and Cohn: a l00 basis point increase in expected inflation, holding real interest rates constant, is predicted to lower the general level of equity prices by 7.8%. In the course of constructing the structural equity market model equity demand equations are estimated for households, life insurance companies, open-end investment companies, property and casualty insurance companies, and state and local government retirement systems. Equations are also estimated for the demand for mutual fund shares by households and equity issues by U.S. nonfinancial corporations.

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Holdings
Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w0542 (Browse shelf(Opens below))	Not For Loan

Total holds: 0

September 1980.

The purpose of the present paper is to investigate the effects of expected inflation on the general level of common stock prices using a structural rather than a reduced-form approach. To this end, an aggregative partial-equilibrium structural econometric model of the U.S. equity market is constructed using quarterly flow-of-funds data. The primary endogenous variable in this model is the Standard and Poor's Index of 500 Common Stock Prices, P. After passing several standard validation exercises he model is used to perform a number of simulation experiments designed o assess the impact of expected inflation on P. To anticipate, we find that increases in expected inflation depress current equity prices by bout the same amount as found in a related study of Modigliani and Cohn: a l00 basis point increase in expected inflation, holding real interest rates constant, is predicted to lower the general level of equity prices by 7.8%. In the course of constructing the structural equity market model equity demand equations are estimated for households, life insurance companies, open-end investment companies, property and casualty insurance companies, and state and local government retirement systems. Equations are also estimated for the demand for mutual fund shares by households and equity issues by U.S. nonfinancial corporations.