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Inflation and the Stock Market

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  • Feldstein, Martin

Abstract

This paper discusses a crucial cause of the failure of share prices to rise during a decade of substantial inflation. Indeed, the share value per dollar of pretax earnings actually fell from 10.82 in 1967 to 6.65 in 1976. The analysis here indicates that this inverse relation between higher inflation and lower share prices during the past decade was not due to chance or to other unrelated economic events. On the contrary, an important adverse effect of increased inflation on share prices results from basic features of the current U.S. tax laws, particularly historic cost depreciation and the taxation of nominal capital gains.
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Suggested Citation

  • Feldstein, Martin, 1980. "Inflation and the Stock Market," American Economic Review, American Economic Association, vol. 70(5), pages 839-847, December.
  • Handle: RePEc:aea:aecrev:v:70:y:1980:i:5:p:839-47
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    References listed on IDEAS

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    1. Nelson, Charles R, 1976. "Inflation and Rates of Return on Common Stocks," Journal of Finance, American Finance Association, vol. 31(2), pages 471-483, May.
    2. Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
    3. Van Horne, James C & Glassmire, William F, Jr, 1972. "The Impact of Unanticipated Changes in Inflation on the Value of Common Stocks," Journal of Finance, American Finance Association, vol. 27(5), pages 1081-1092, December.
    4. Motley, Brian, 1969. "Inflation and Common Stock Values: Comment," Journal of Finance, American Finance Association, vol. 24(3), pages 530-535, June.
    5. Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
    6. Hong, Hai, 1977. "Inflation and the Market Value of the Firm: Theory and Tests," Journal of Finance, American Finance Association, vol. 32(4), pages 1031-1048, September.
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