Infl ation and Financial MarketPerformance: What Have We Learned inthe Last Ten Years?

Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. The last decade has witnessed a great deal of theoretical and empirical research on the relationships between inflation, financial market performance, and economic growth. This paper provides a survey of that literature and presents new crosscountry empirical results on this topic. We find that inflation is negatively associated with banking industry size, real returns on financial assets, and bank profitability. We also discover a positive relationship between asset return volatility and inflation.