The relation between Stock returns and Inflation rates: International Evidence from Central Bank Independence level

Abstract

Extreme inflation and volatile stock markets have recently considered as a serious problem for society around the world. The study of the relation between inflation and stock returns has been one of the more fascinating historical issues. This paper adds to the knowledge of previous studies by using the adjusted CBI factor as a variable to explain the relationship between stock price return and inflation rate using a data set from the G7 countries. By extending the analytical framework of earlier study, an empirical study was carried out. When central bank independence is included as an explanatory variable in the regression analysis, the results show a stronger negative association between inflation rates and stock returns. The findings have important implications since they offer different insights on central banks' independence level, knowledge from earlier studies of inflation and stock returns, and considerations for both investors and monetary officials who determine the CBI's constituent parts.