inflation

However, if the rate of inflation is increased excessively, real returns will be driven down to the point where credit market frictions become binding.

These actions may induce movements in nominal stock returns that cancel out or taper off those induced by innovations in real activity or inflation.

After all, rational investors should adjust nominal returns to changes in inflation, in the dividend process and in the discount factor.

Along these paths, as often happens with observed series, inflation is autocorrelated and deviations from target cannot be accounted for as simple stochastic innovations.

Clearly, for values of around 1, this cannot be expected because past inflation has almost no predictive power.

The initial inflation target was 3% until the end of 1992 and then it was reduced to 2% in 1993 until the end of 1995.

It further gains by having marketbased measures of specific types of inflation.

Note that all variables except for the interest and inflation rates are in logarithms and refer to deviations from some exogenous equilibrium (growth path).

In the long run, stocks are considered a partial hedge for inflation risk.

Figure 3 shows that the optimal volatility of inflation decreases when the elasticity of demand increases (the markup decreases).

The positive and partly delayed responses of income and inflation are plausible.

Lower inflation rates not only lead to clearer pricing signals and better investment decisions by economic agents, but also protect fixed income earners.

An interesting question is whether an inflation threshold, for example, of 10 percent is significantly different from a threshold of 8 percent or 15 percent.

But, as soon as the war ended, social unrest spread rapidly because of fierce inflation and other factors.

For simplicity, the inflation rate, the money growth rate, and the output growth rate are assumed to be zero in the steady-state.