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Are Tax Effects Important in the Long-Run Fisher Relationship? Evidence from the Municipal Bond Market

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  • William J. Crowder

    (University of Texas at Arlington,)

  • Mark E. Wohar

    (University of Nebraska at Omaha)

Abstract

Are nominal bonds appropriately discounted for taxes? Empirical estimates of the response of nominal interest rates to changes in inflation, the Fisher effect, have failed to produce a definitive answer. Four reasons have been put forward as possible explanations: (i) Tobin effects, (ii) fiscal illusion, (iii) peso problems, and (iv) different estimators. Utilizing data on taxable and tax-exempt bond interest rates and several different estimators, we find that the Fisher effect estimates are always larger for the taxable bond relative to the tax-exempt bond, suggesting that fiscal illusion and different estimators cannot account for the previous results. Copyright The American Finance Association 1999.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 54 (1999)
Issue (Month): 1 (02)
Pages: 307-317

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Handle: RePEc:bla:jfinan:v:54:y:1999:i:1:p:307-317

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Cited by:
  1. Crowder, William J. & Wohar, Mark E., 1999. "The changing long-run linkage between yields on Treasury and municipal bonds and the 1986 Tax Act," Review of Financial Economics, Elsevier, vol. 8(2), pages 101-119.
  2. Augustine Arize & John Malindretos & Kiseok Nam, 2005. "Inflation and Structural Change in 50 Developing Countries," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(4), pages 461-471, December.
  3. Margaret Lamb & Andrew Lymer, 1999. "Taxation research in an accounting context: future prospects and interdisciplinary perspectives," European Accounting Review, Taylor & Francis Journals, vol. 8(4), pages 749-776.
  4. Andrew Phiri & Peter Lusanga, 2011. "Can asymmetries account for the empirical failure of the Fisher effect in South Africa?," Economics Bulletin, AccessEcon, vol. 31(3), pages 1968-1979.
  5. Ka-Fu Wong & Hai-Jun Wu, 2003. "Testing Fisher hypothesis in long horizons for G7 and eight Asian countries.1," Applied Economics Letters, Taylor & Francis Journals, vol. 10(14), pages 917-923.
  6. Henry, Olan T. & Shields, Kalvinder, 2004. "Is there a unit root in inflation?," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 481-500, September.
  7. James R. Rhodes, 2006. "DEVOLUTION OF THE FISHER EQUATION: Rational Appreciation to Money Illusion," GRIPS Discussion Papers 08-04, National Graduate Institute for Policy Studies, revised Jun 2008.
  8. Christopher J. Neely & David E. Rapach, 2008. "Real interest rate persistence: evidence and implications," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 609-642.
  9. Rapach, David E. & Weber, Christian E., 2004. "Are real interest rates really nonstationary? New evidence from tests with good size and power," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 409-430, September.
  10. Çiçek, Serkan & Akar, Cüneyt, 2013. "The asymmetry of inflation adjustment in Turkey," Economic Modelling, Elsevier, vol. 31(C), pages 104-118.
  11. Maydew, Edward L., 2001. "Empirical tax research in accounting: A discussion," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 389-403, September.
  12. Eva Vicente Martinez, 2006. "Properties Of Two U.S. Inflation Measures (1985-2005)," Statistics and Econometrics Working Papers ws066818, Universidad Carlos III, Departamento de Estadística y Econometría.
  13. Tsong, Ching-Chuan & Lee, Cheng-Feng, 2011. "Asymmetric inflation dynamics: Evidence from quantile regression analysis," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 668-680.

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