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Inflation and the Stock Market

  • Feldstein, Martin

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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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 70 (1980)
Issue (Month): 5 (December)
Pages: 839-47

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Handle: RePEc:aea:aecrev:v:70:y:1980:i:5:p:839-47
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  1. 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 1081-92, December.
  2. Nelson, Charles R, 1976. "Inflation and Rates of Return on Common Stocks," Journal of Finance, American Finance Association, vol. 31(2), pages 471-83, May.
  3. 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.
  4. Alan J. Auerbach, 1980. "Share Valuation and Corporate Equity Policy," NBER Working Papers 0255, National Bureau of Economic Research, Inc.
  5. Motley, Brian, 1969. "Inflation and Common Stock Values: Comment," Journal of Finance, American Finance Association, vol. 24(3), pages 530-35, June.
  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 1031-48, September.
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