Inflation, Resource Utilization, and Debt and Equity Returns
NBER Working Paper No. 699 (Also Reprint No. r0290)
Enormously diverse real and nominal ex post returns on equity and short and long term debt securities have accompanied substantial variations in inflation and resource utilization during the past half century. This paper contains an examination of the relationships among these security returns and an analysis of the effects of inflation and resource utilization on the relationships. The three major results are the following. First, prior to the Treasury-Federal Reserve Accord in 1951, nominal yields on one-month Treasury bills were reasonably stable, while real bill rates were incredibly volatile. Since 1952, the reverse has been true. Nominal bill rates have cycled around a rising trend, and real bill rates have stayed near zero. Second, changes in yields on new-issue, long-term bonds have been largely unanticipated, and these changes have dominated the realized returns on bonds relative to Treasury bills. Because bond rates have risen with (unexpected) inflation during the last fifteen years, bonds have earned negative real returns. Third, the relative returns on equities and bonds are greatly affected by the business cycle with equities performing very well around troughs and very poorly around peaks. This has been true for all ten troughs since 1926 and all six peaks since 1946.