Monetary policy and dividend growth in Germany: long-run structural modelling versus bounds testing approach

Abstract

This study examines the long-run relationship between monetary policy and dividend growth in Germany. For this purpose, cointegration is tested for between both variables in the period 1974 to 2003. However, problems related to spurious regression arise from the mixed order of integration of the series used, from mutual causation between the variables and from the lack of a long-run relationship among the variables of the model. These problems are addressed by applying the bounds testing approach to cointegration in addition to a more standard long-run structural modelling approach. In principle, both procedures are capable of dealing with the controversial issue of the exogeneity of monetary policy vis-a-vis dividend growth. However, the structural modelling approach still leaves a certain degree of uncertainty about the integration properties of the interest rate and the dividend growth. Hence, one feels legitimized to refer to the bounds testing procedure and to conclude that in the longer term short-term rates drive stock returns but not vice versa.

Inflation and the dividend policy of US firms

“…Therefore, this is a potentially relevant variable. It would, for example, be possible to combine the approach suggested here with the empirical model of Belke and Polleit (2006) who examine the long‐run relationship between dividend growth and monetary policy. Both studies seem to fit together like pieces in a puzzle because the activities of firms commonly called “dividend policy” analysed here are a disturbance in Belke and Polleit (2006) while the activities of central bankers which are usually called “monetary policy” are not observed here.…”

“…We also could have used the ARDL approach. The main advantage of this method is that it is not necessary to a priori determine the order of integration of the examined time series (Bahmani‐Oskooee and Ng, 2002; Belke and Polleit, 2006). However, we are quite confident that all four variables in the model are I(1).…”

European outbound tourism expansion on the islands of Cape Verde

“…Second, this technique has been used in time series analyses in a number of fields (e.g. tourism: Saayman and Saayman, 2015; finance: Belke and Polleit, 2006); agriculture: Muchapondwa, 2009; energy: Narayan and Smyth, 2005). Third, the ARDL model takes a sufficient number of lags to appropriately represent the data-generating process and different variables can be assigned different lag-lengths.…”

Liquidity and the Dynamic Pattern of Price Adjustment: A Global View

“…The monetary aggregate we use is M2 for the US, M3 for the which contain elements of misguided expectation formation. See Allan, Morris and Shin (2003), Gorton (2008) or, for a survey, Belke and Polleit (2006). 4 For a detailed discussion of the relevance of these arguments see Gros (2007), OECD (2005) and Shiller (2005).…”