The signalling content of asset prices for inflation: Implications for quantitative easing

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We investigate the information content of financial variables as signalling devices of two abnormal inflationary regimes: (1) low inflation or deflation, and (2) high inflation. Specifically, we determine the information content of equity and house prices, private credit volumes, and sovereign and corporate bond yields, for 11 advanced economies over the past three decades, using both signalling extraction and logit modelling. The outcomes show that high asset prices more often signal high inflation than low inflation/deflation. However, in some countries, high asset prices and low bond yields are a significant indicator of low inflation or deflation as well. The transmission time of financial developments to inflation can be quite long (up to 8 quarters). For monetary policy, these findings imply that stimulating asset prices through Quantitative Easing (QE) can effectively influence inflation, but that the effects are quite uncertain, both regarding timing and direction.
Original languageEnglish
Pages (from-to)45-63
Number of pages19
JournalEconomic Systems
Volume42
Issue number1
Early online date3 Feb 2018
DOIs
Publication statusPublished - Mar 2018

Fingerprint

Inflation
Asset prices
Quantitative easing
Deflation
Information content
High inflation
Bond yields
House prices
Corporate bonds
Logit modeling
Credit
Financial variables
Monetary policy
Financial development
Sovereign bonds
Equity prices

Keywords

  • Financial markets
  • Inflation
  • Quantitative easing

Cite this

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title = "The signalling content of asset prices for inflation: Implications for quantitative easing",
abstract = "We investigate the information content of financial variables as signalling devices of two abnormal inflationary regimes: (1) low inflation or deflation, and (2) high inflation. Specifically, we determine the information content of equity and house prices, private credit volumes, and sovereign and corporate bond yields, for 11 advanced economies over the past three decades, using both signalling extraction and logit modelling. The outcomes show that high asset prices more often signal high inflation than low inflation/deflation. However, in some countries, high asset prices and low bond yields are a significant indicator of low inflation or deflation as well. The transmission time of financial developments to inflation can be quite long (up to 8 quarters). For monetary policy, these findings imply that stimulating asset prices through Quantitative Easing (QE) can effectively influence inflation, but that the effects are quite uncertain, both regarding timing and direction.",
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The signalling content of asset prices for inflation: Implications for quantitative easing. / de Haan, Leo; van den End, Jan Willem.

In: Economic Systems, Vol. 42, No. 1, 03.2018, p. 45-63.

Research output: Contribution to JournalArticleAcademicpeer-review

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AB - We investigate the information content of financial variables as signalling devices of two abnormal inflationary regimes: (1) low inflation or deflation, and (2) high inflation. Specifically, we determine the information content of equity and house prices, private credit volumes, and sovereign and corporate bond yields, for 11 advanced economies over the past three decades, using both signalling extraction and logit modelling. The outcomes show that high asset prices more often signal high inflation than low inflation/deflation. However, in some countries, high asset prices and low bond yields are a significant indicator of low inflation or deflation as well. The transmission time of financial developments to inflation can be quite long (up to 8 quarters). For monetary policy, these findings imply that stimulating asset prices through Quantitative Easing (QE) can effectively influence inflation, but that the effects are quite uncertain, both regarding timing and direction.

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