Do Inflation and High Taxes Increase Bank Leverage?

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Do Inflation and High Taxes Increase Bank Leverage?

Author Info

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

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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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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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-12-01 (All new papers)
NEP-FIN-2005-12-01 (Finance)
NEP-FMK-2005-12-01 (Financial Markets)
NEP-MAC-2005-12-01 (Macroeconomics)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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.
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. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
Other versions:
- Robert C. Merton, 1995. "Financial Innovation and the Management and Regulation of Financial Institutions," NBER Working Papers 5096, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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. [Downloadable!]
Franklin Allen & Roni Michaely, 2002. "Payout Policy," Center for Financial Institutions Working Papers 01-21, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
Other versions:
- 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. [Downloadable!] (restricted)

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