Is Disinflation Good for the Stock Market?

The stock market appreciates by an average of 24 percent in real dollar terms

when countries attempt to stabilize annual inf lation rates that are greater than 40 percent. In contrast, the average market response is 0 when the pre-stabilization rate of inf lation is less than 40 percent. These results suggest that the potential long-run benefits of stabilization may dominate short-run costs at high levels of inf lation, but at low to moderate levels of inf lation, benefits may be offset by costs in a present value sense. Stock market responses also help predict the change in inflation and output in the year following all 81 stabilization efforts.

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