Hostname: page-component-586b7cd67f-rdxmf Total loading time: 0 Render date: 2024-11-23T19:07:07.547Z Has data issue: false hasContentIssue false
  • English
  • Français

Inflation, the Interest Rate, and the Required Return on Equity

Published online by Cambridge University Press:  06 April 2009

Jeffrey F. Jaffe
Get access Rights & Permissions [Opens in a new window]

Abstract

Miller has analyzed capital structure in the presence of both corporate and personal taxes. The present work investigates the effect of inflation on both interest rates and equity returns when the Miller equilibrium condition is employed in a loanable funds model. Both an interest rate effect and a redistribution effect are derived. The interest rate effect forces the responsiveness of the interest rate to the inflation rate to be below that hypothesized by Darby. However, the redistribution effect may change this responsiveness in either direction.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 20 , Issue 1 , March 1985 , pp. 29 - 44
Copyright
Copyright © School of Business Administration, University of Washington 1985

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Black, Fisher, and Scholes, Myron. “The Effect of Dividend Yield and Dividend Policy on Common Stock Prices and Returns.” Journal of Financial Economics, Vol. I (05 1974), pp. 1–22.CrossRefGoogle Scholar
[2]Blume, , Marshall, . “Stock Returns and Dividend Yields: Some More Evidence.” Working Paper No. 1–79, Rodney L. White Center for Financial Research, University of Pennsylvania, Wharton School, Philadelphia, PA. (1979).Google Scholar
[3]Cagan, , Philip, . Studies in the Quantity Theory of Money. Friedman, M., ed. Chicago, IL: University of Chicago Press (1956).Google Scholar
[4]Cross, , Stephen, . “A Note on Inflation, Taxes and Investment Returns.” Journal of Finance, Vol. 35 (03 1980), pp. 177–180.CrossRefGoogle Scholar
[5]Darby, Michael. ‘The Financial and Tax Effects of Monetary Policy on Interest Rates.” Economic Inquiry, Vol. 13 (06 1975), pp. 266–276.CrossRefGoogle Scholar
[6]DeAngelo, , Harry, , and Masulis, Ronald. “Optimal Capital Structure under Corporate and Personal Taxation.” Journal of Financial Economics, Vol. 8 (03 1980), pp. 3–29.CrossRefGoogle Scholar
[7]Fama, Eugene. “Short-Term Interest Rates as Predictors of Inflation.” American Economic Review, Vol. 65 (06 1975), pp. 269–282.Google Scholar
[8]Feldstein, Martin. “Inflation, Taxes, and the Rate of Interest: A Theoretical Analysis.” American Economic Review, Vol. 66 (12 1976), pp. 889–920.Google Scholar
[9]Feldstein, Martin, and Eckstein, Otto. “The Fundamental Determinants of the Interest Rate.” Review of Economics and Statistics, Vol. 52 (11 1970), pp. 363–376.CrossRefGoogle Scholar
[10]Feldstein, Martin; Green, Jerry; and Sheshinski, Eytan. “Inflation and Taxes in a Growing Economy with Debt and Equity Finance.” Journal of Political Economy, Vol. 86 (04 1978), pp. 553–570.CrossRefGoogle Scholar
[11]Friedman, Milton. A Theory of the Consumption Function. Princeton, NJ: Princeton University Press (1957).CrossRefGoogle Scholar
[12]Gandolfi, Arthur. “Inflation, Taxation, and Interest Rates.” Journal of Finance, Vol. 37 (06 1982), pp. 797–807.CrossRefGoogle Scholar
[13]Gandolfi, Arthu. “Taxation and the ‘Fisher Effect.’” Journal of Finance, Vol. 31 (12 1976), pp. 1375–1386.Google Scholar
[14]Hamada, Robert. “Differential Taxes and the Structure of Equilibrium Rates of Return: Managerial Implications and Remaining Conundrums.” Working Paper #68, Center for Research in Security Prices, University of Chicago, Chicago, IL. (04 1982).Google Scholar
[15]Jaffe, Jeffrey. “A Note on Taxation and Investment.” Journal of Finance, Vol. 33 (12 1978), pp. 1439–1446.CrossRefGoogle Scholar
[16]Litzenberger, Robert, and Ramaswamy, K.. “The Effect of Personal Taxes and Dividends on Capital Asset Prices; Theory and Empirical Evidence.” Journal ofFinancial Economics, Vol. 7 (06 1979), pp. 163–195.CrossRefGoogle Scholar
[17]Miller, Merton. “Debt and Taxes.” Journal of Finance, Vol. 32 (05, 1977), pp. 261–275.Google Scholar
[18]Miller, Merton, and Scholes, Myron. “Dividends and Taxes.” Journal of Financial Economics, Vol. 6 (12 1978), pp. 333–364.CrossRefGoogle Scholar
[19]Modigliani, Franco. “Debt, Dividend Policy, Taxes, Inflation and Market Valuation.” Journal of Finance, Vol. 37 (05 1982), pp. 255–273.CrossRefGoogle Scholar
[20]Modigliani, Franco, and Miller, Merton. “The Cost of Capital, Corporation Finance, and the Theory of Investment.” American Economic Review, Vol. 48 (06 1958), pp. 261–297.Google Scholar
[21]Modigliani, Franco, and Miller, Merton. “Corporate Income Taxes and the Cost of Capital: A Correction.” American Economic Review, Vol. 53 (06 1963), pp. 433–443.Google Scholar
[22]Mundell, Robert. “Inflation and Interest Rates.” Journal of Political Economy, Vol. 71 (06 1963), pp. 280–283.CrossRefGoogle Scholar
[23]Santomero, Anthony. “A Model of the Demand for Money by Households.” Journal of Finance, Vol. 29 (03 1974), pp. 89–102.CrossRefGoogle Scholar
[24]Taggert, Robert. “Taxes and Corporate Capital Structure in an Incomplete Market.” Journal of Finance, Vol. 35 (06 1980), pp. 645–660.CrossRefGoogle Scholar