Stock Returns, Term Structure, Inflation and Real Activity : An International Perspective

This paper analyzes the empirical interdependencies among asset returns, real activity and inflation from a multi-country and international point of view. We find that nominal stock returns are significantly related to inflation only in the U.S, that the U.S. term structure of interest rates predicts both domestic and foreign inflation rates while foreign term structures do not have this predictive power, and that innovations in inflation and exchange rates induce insignificant responses of real and financial variables. An interpretation of the dynamics and some policy implications of the results are provided