This paper employs a constant conditional correlation bivariate EGARCH-in-mean model to\ninvestigate interactions among the rate of inflation, stock returns and their respective\nvolatilities. This approach is capable of accommodating all the possible causalities among the\nfour variables simultaneously, and therefore could deliver contemporary evidence of the\nnexus between monetary stability and stock market. The postwar dataset of the US inflation\nand stock returns is divided into pre- and post- Volcker period and the estimation results show\nsome significant changes of inflation-stock return relation, as well as indirect links between\ntwo volatilities. The core findings in this study suggest that promoting monetary stability\ncontributes to more mutual interactions among the four variables, in particular, common\nstock is a more effective hedge against inflation, and the level of inflation rate is central to\nexplaining the relation between the two volatilities.
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