Department of Economics and Business Economics

The predictive power of dividend yields for future inflation: Money illusion or rational causes?

Research output: Working paperResearch

Standard

The predictive power of dividend yields for future inflation: Money illusion or rational causes? / Engsted, Tom; Pedersen, Thomas Quistgaard.

Aarhus : Institut for Økonomi, Aarhus Universitet, 2016.

Research output: Working paperResearch

Harvard

APA

Engsted, T., & Pedersen, T. Q. (2016). The predictive power of dividend yields for future inflation: Money illusion or rational causes? Institut for Økonomi, Aarhus Universitet. CREATES Research Papers No. 2016-11

CBE

MLA

Engsted, Tom and Thomas Quistgaard Pedersen The predictive power of dividend yields for future inflation: Money illusion or rational causes?. Aarhus: Institut for Økonomi, Aarhus Universitet. (CREATES Research Papers; Journal number 2016-11). 2016., 53 p.

Vancouver

Author

Engsted, Tom ; Pedersen, Thomas Quistgaard. / The predictive power of dividend yields for future inflation: Money illusion or rational causes?. Aarhus : Institut for Økonomi, Aarhus Universitet, 2016. (CREATES Research Papers; No. 2016-11).

Bibtex

@techreport{e235fc19559a4a57a5bf018578b028c9,
title = "The predictive power of dividend yields for future inflation: Money illusion or rational causes?",
abstract = "In long-term US data the stock market dividend yield is a strong predictor of long-horizon inflation with a negative slope coefficient. This finding is puzzling in light of the traditional Modigliani-Cohn money illusion hypothesis according to which the dividend yield varies positively with expected inflation. To rationalize the finding we develop a consumption-based model with recursive preferences and money illusion. The model with reasonable values of risk aversion and intertemporal elasticity of substitution, and either rational or adaptive expectations, implies significantly negative slope coefficients that increase numerically with the horizon in regressions of future inflation onto the dividend yield, in accordance with the data. A purely rational version of the model with no money illusion, but with a link from expected inflation to real consumption growth, also generates a negative inflation-dividend yield relationship.",
keywords = "Modigliani-Cohn money illusion, predictive regressions, long-run risk, Campbell-Vuolteenaho methodology",
author = "Tom Engsted and Pedersen, {Thomas Quistgaard}",
year = "2016",
month = apr,
day = "26",
language = "English",
series = "CREATES Research Papers",
publisher = "Institut for {\O}konomi, Aarhus Universitet",
number = "2016-11",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, Aarhus Universitet",

}

RIS

TY - UNPB

T1 - The predictive power of dividend yields for future inflation: Money illusion or rational causes?

AU - Engsted, Tom

AU - Pedersen, Thomas Quistgaard

PY - 2016/4/26

Y1 - 2016/4/26

N2 - In long-term US data the stock market dividend yield is a strong predictor of long-horizon inflation with a negative slope coefficient. This finding is puzzling in light of the traditional Modigliani-Cohn money illusion hypothesis according to which the dividend yield varies positively with expected inflation. To rationalize the finding we develop a consumption-based model with recursive preferences and money illusion. The model with reasonable values of risk aversion and intertemporal elasticity of substitution, and either rational or adaptive expectations, implies significantly negative slope coefficients that increase numerically with the horizon in regressions of future inflation onto the dividend yield, in accordance with the data. A purely rational version of the model with no money illusion, but with a link from expected inflation to real consumption growth, also generates a negative inflation-dividend yield relationship.

AB - In long-term US data the stock market dividend yield is a strong predictor of long-horizon inflation with a negative slope coefficient. This finding is puzzling in light of the traditional Modigliani-Cohn money illusion hypothesis according to which the dividend yield varies positively with expected inflation. To rationalize the finding we develop a consumption-based model with recursive preferences and money illusion. The model with reasonable values of risk aversion and intertemporal elasticity of substitution, and either rational or adaptive expectations, implies significantly negative slope coefficients that increase numerically with the horizon in regressions of future inflation onto the dividend yield, in accordance with the data. A purely rational version of the model with no money illusion, but with a link from expected inflation to real consumption growth, also generates a negative inflation-dividend yield relationship.

KW - Modigliani-Cohn money illusion, predictive regressions, long-run risk, Campbell-Vuolteenaho methodology

M3 - Working paper

T3 - CREATES Research Papers

BT - The predictive power of dividend yields for future inflation: Money illusion or rational causes?

PB - Institut for Økonomi, Aarhus Universitet

CY - Aarhus

ER -