Japan and the United Kingdom: The Inflation Irrelevance Proposition

This paper is about the generalized proposition of inflation irrelevance. The weak-form version of inflation irrelevance holds that stock prices are independent of inflation rates. The semi-strong form version is that stock prices are independent of both domestic and foreign inflation rates. The strong, or generalized, version is that stock returns are independent of all three rates, domestic and foreign inflation rates, and changes in foreign exchange rates. Overall, the three forms fail to be rejected separately and jointly under conventional marginal significance levels. The conclusion from this paper is that inflation irrelevance, or nominal neutrality, is a common characteristic in the two countries studied, Japan and the United Kingdom. Therefore, the statistical evidence is mounting manifestly, and is pervasive and applies to diverse economies, among which Japan and UK. This regularity amounts to an international stylized empirical fact that cannot be ignored.