02772cas a2200301 a 4500 AALejournalIMF022374 230101c9999 xx r poo 0 0eng d 5.00 USD 9781513586755 1018-5941 BD-DhAAL BD-DhAAL Zhang, Zhongxia. Stock Returns and Inflation Redux : An Explanation from Monetary Policy in Advanced and Emerging Markets / Zhongxia Zhang. Washington, D.C. : International Monetary Fund, 2021. 1 online resource (59 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Classical theories of monetary economics predict that real stock returns are negatively correlated with inflation when monetary policy is countercyclical. Previous empirical studies mostly focus on a small group of developed countries or a few countries with hyperinflation. In this paper, I examine the stock return-inflation relation under different monetary policy regimes and conditions using an expanded dataset of 71 economies. Empirical evidence suggests that the stock return-inflation relation is partially driven by monetary policy. If a country's monetary authority conducts a more countercyclical monetary policy, the stock return-inflation relation becomes more negative. In addition, the results differ by monetary policy framework. In exchange rate anchor countries, stock markets do not respond to monetary policy cyclicality. In inflation targeting countries, stock markets react more strongly to inflation. A key contribution of this paper is to classify inflation targeters by their behaviors, and illustrate that behavior matters in shaping market perceptions: markets react to inflation and monetary policy cyclicality when central banks are able to control inflation within their target bands. In this case markets are sensitive to inflation dynamics when inflation is above the announced target bands. Finally, when monetary policy is constrained by the Zero Lower Bound (ZLB), a structural break is introduced and real stock returns no longer respond to inflation and monetary policy cyclicality. Mode of access: Internet Deflation imf Inflation imf Monetary Policy imf Pension Funds imf Price Level imf IMF Working Papers; Working Paper ; No. 2021/219 Full text available on IMF http://elibrary.imf.org/view/journals/001/2021/219/001.2021.issue-219-en.xml IMF e-Library