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Do Inflation and High Taxes Increase Bank Leverage?

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  • Hortlund, Per

    ()
    (Dept. of Economics, Stockholm School of Economics)

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    Abstract

    Does the combination of inflation and high corporate taxes explain the increase in bank leverage in the 20th century? Inflation automatically increases bank debt, while high corporate taxes hinder capital accumulation. Capital ratios therefore drop, until leverage-induced returns are sufficient to uphold them at constant levels. This theory was confronted with Swedish bank data 1870–2001. Bank capital ratios dropped when inflation and corporate tax rates were high, during WWI and in 1940–1980. The theory can explain the sinking bank capital ratios during these periods, but also their relative stability since the early 1980s. High corporate taxes and inflation were estimated to account for half of the drop in Swedish bank capital ratios since WWII.

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    File URL: http://swopec.hhs.se/hastef/papers/hastef0612.pdf
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    Bibliographic Info

    Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 612.

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    Length: 48 pages
    Date of creation: 17 Nov 2005
    Date of revision:
    Handle: RePEc:hhs:hastef:0612

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    Keywords: Bank leverage; Capital-asset ratio; Inflation; Corporate taxes.;

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    1. Allen, Franklin & Michaely, Roni, 2003. "Payout policy," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 7, pages 337-429 Elsevier.
    2. Bohlin, Jan, 2003. "Swedish historical national accounts: The fifth generation," European Review of Economic History, Cambridge University Press, vol. 7(01), pages 73-97, April.
    3. Romer, Christina D, 1986. "Is the Stabilization of the Postwar Economy a Figment of the Data?," American Economic Review, American Economic Association, vol. 76(3), pages 314-34, June.
    4. Merton, Robert C., 1995. "Financial innovation and the management and regulation of financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 461-481, June.
    5. Englund, Peter, 1999. "The Swedish Banking Crisis: Roots and Consequences," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 80-97, Autumn.
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