MONEY, INFLATION, AND STOCK RETURNS IN THE PACIFIC BASIN MARKETS

This study examines the relationship between stock returns and inflation in Japan, South Korea, and Taiwan. Stock returns in these Pacific Basin markets are found robe related negatively to inflation. A Vector Autoregressive (VAR) modelling technique is employed to delineate the various channels of influence in a system with inflation, stock returns, money supply, production, and government deficits. The findings support the argument that the negative relationship between stock returns and inflation in all three market is spurious, caused by the counter cyclical monetary policy. In addition, only Japan appears to monetize its deficits that further reinforces the effects of the counter cyclical policy.