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Asset Prices and Consumer Prices: Exploring the Linkages

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Gerdesmeier, D., Reimers, H., Roffia, B. Asset Prices and Consumer Prices: Exploring the Linkages. Applied Economics Quarterly, 62(3), 169-186. https://doi.org/10.3790/aeq.62.3.169
Gerdesmeier, Dieter; Reimers, Hans-Eggert and Roffia, Barbara "Asset Prices and Consumer Prices: Exploring the Linkages" Applied Economics Quarterly 62.3, , 169-186. https://doi.org/10.3790/aeq.62.3.169
Gerdesmeier, Dieter/Reimers, Hans-Eggert/Roffia, Barbara: Asset Prices and Consumer Prices: Exploring the Linkages, in: Applied Economics Quarterly, vol. 62, iss. 3, 169-186, [online] https://doi.org/10.3790/aeq.62.3.169

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Asset Prices and Consumer Prices: Exploring the Linkages

Gerdesmeier, Dieter | Reimers, Hans-Eggert | Roffia, Barbara

Applied Economics Quarterly, Vol. 62 (2016), Iss. 3 : pp. 169–186

2 Citations (CrossRef)

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European Central Bank, Sonnemannstr. 22, 60314 Frankfurt am Main, Germany

Corresponding author: Hochschule Wismar, Postfach 1210, 23952 Wismar

European Central Bank, Sonnemannstr. 22, 60314 Frankfurt am Main, Germany

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  2. Unravelling the Secrets of Inflation in the Euro Area – A Frequency Decomposition Approach

    Gerdesmeier, Dieter | Roffia, Barbara | Reimers, Hans-Eggert

    Folia Oeconomica Stetinensia, Vol. 20 (2020), Iss. 1 P.133

    https://doi.org/10.2478/foli-2020-0008 [Citations: 0]

Abstract

It is a well-established fact in monetary economics that money and credit developments may affect consumer price inflation directly as well as indirectly via changes in asset prices, while at the same time asset price fluctuations can independently affect monetary and real developments. This has led to proposals to assign a more prominent role to asset prices in central bank’s toolkit of leading indicators for future developments in consumer price inflation. In this study, we examine, in the context of reduced-form inflation equations, the importance of different variables (including standard explanatory variables) as well as some specific asset price variables (i.e., the changes in housing and equity prices, a yield spread and oil prices). Against this background, we make use of a panel approach, covering data for 17 industrialised countries and the euro area. Three main results emerge out of our analysis. First, a standard framework explaining current inflation by (lagged) developments in inflation, the output gap, short-term interest rates, oil prices, house and stock prices and the exchange rate seems to perform quite well, although the explanatory power of the equations decreases with the length of the time horizon. Second, as regards the role of asset prices, it can be shown that house price movements seem to provide more useful information on future consumer price developments than movements in equity prices. Finally, the results of the analysis show that broad monetary developments become more relevant as the time horizon lengthens. By contrast, equity prices and the yield spread seem to be somewhat less informative.

JEL Classifications: E37, E44, E51