To study the relationship between inflation and yield on common stock, Bruno Oudet€¡ used the following model:

where L = real per capita monetary base

Y = real per capita income

I = the expected rate of inflation

NIS = a new issue variable

E = expected end-of-period stock returns, proxied by lagged stock price ratios

R_bt = bond yield

R_st = common stock returns

a. Offer a theoretical justification for this model and see if your reasoning agrees with that of Oudet.

b. Which are the endogenous variables in the model? Which are the exogenous variables?

c. How would you treat the lagged Rbt€”endogenous or exogenous?

Rht + R + 3Rhr-1 + L, + as + NIS, + 7] +ur R +) RH+ Rb,-1 + ,L+ 5Y+ 6NIS, + + L st