Do Asset Prices Help to Predict Consumer Price Inflation?

Posted: 5 Jun 2001

See all articles by Charles Goodhart

Charles Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group

Boris Hofmann

Bank for International Settlements (BIS) - Monetary and Economic Department

Abstract

With goods prices being sticky, monetary impulses are initially transmitted to the real economy via changes in asset prices; and asset price fluctuations can independently affect monetary and real developments. Most empirical models try to incorporate such monetary-asset price interactions by the inclusion of a short-term interest rate and the exchange rate, but there are good reasons to doubt the sufficiency of this. Here we examine whether the predictive power of a reduced form equation for inflation, including standard explanatory variables, can be improved by adding other asset price variables, i.e. the changes in housing and equity prices and a yield spread. In our cross-country time series exercise, we find that housing price movements do provide useful extra information on future inflation, with equity prices and the yield spread being somewhat less informative.

Suggested Citation

Goodhart, Charles A.E. and Hofmann, Boris, Do Asset Prices Help to Predict Consumer Price Inflation?. Manchester School, Vol. 68, No. 5, Available at SSRN: https://ssrn.com/abstract=242532

Charles A.E. Goodhart (Contact Author)

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)

Boris Hofmann

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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