THE PRICE-DIVIDEND RELATIONSHIP IN INFLATIONARY AND DEFLATIONARY REGIMES

Abstract

This paper argues that the linear price-dividend relationship as predicted in the Gordon model breaks down in regimes of high inflation and deflation. Using data for the US and the UK over the period from 1871 to 2002, nonlinear estimates support the prediction of the model.Regime-switching, nonlinearity, price-dividend relationship, inflation and deflation.