Inflation illusion and the US dividend yield: Some further evidence

This paper uses Campbell and Vuolteenaho's (2004a,b) procedure to provide evidence on the source of the positive correlation between the US dividend yield and expected inflation. It finds that results derived from the procedure are sensitive to the data period but that Chen and Zhao's (2009) criticism of it is of minor importance. Over the period when the procedure produces stable results – 1953–1989 – we find support for Modigliani and Cohn's (1979) money-illusion hypothesis, little support for Fama's (1981) proxy hypothesis, and strong evidence against the hypothesis that rises in expected inflation raise subjective real equity premia.