Aggregate Profitability Changes, Monetary Policy and Inflation

Posted: 7 Dec 2013

See all articles by Maria Apostolidi

Maria Apostolidi

Athens University of Economics and Business - Department of Accounting and Finance

Dimosthenis L. Hevas

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: October 28, 2013

Abstract

We investigate the monetary linkage between aggregate accounting profitability changes and inflation. Recent previous evidence reveals a strong relation between aggregate earnings changes and the three components of expected stock market returns (i.e., real riskless rate, expected inflation, and expected equity risk premium) further supporting the theory of aggregate earnings changes releasing discount rate news. Extending the evidence of previous literature, this paper investigates the impact of aggregate profitability changes on monetary-policy-stance measures in order to explain the relation between aggregate profitability changes and inflation growth. The paper examines simultaneously the causal relations among aggregate profitability changes, monetary policy changes and inflation growth using vector autoregressive (VAR) models. Our empirical results document that the relation between aggregate profitability changes and inflation growth is the result of a positive relation between aggregate profitability and monetary policy changes represented either by effective federal funds, federal funds premium or real federal funds rate.

Keywords: Aggregate Profitability Measures, Inflation, Monetary Policy, Macroeconomy

JEL Classification: M41, E31, E52

Suggested Citation

Apostolidi, Maria and Hevas, Dimosthenis (Dimosthenes) L., Aggregate Profitability Changes, Monetary Policy and Inflation (October 28, 2013). Available at SSRN: https://ssrn.com/abstract=2364128 or http://dx.doi.org/10.2139/ssrn.2364128

Maria Apostolidi (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Dimosthenis (Dimosthenes) L. Hevas

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

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