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Taxes, regulations, and asset prices

Author

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  • Ellen R. McGrattan
  • Edward C. Prescott

Abstract

U.S. stock prices have increased much faster than gross domestic product GDP) in the postwar period. Between 1962 and 2000, corporate equity value relative to GDP nearly doubled. In this paper, we determine what standard growth theory says the equity value should be in 1962 and 2000, the two years for which our steady-state assumption is a reasonable one. We find that the actual valuations were close to the theoretical predictions in both years. The reason for the large run-up in equity value relative to GDP is that the average tax rate on dividends fell dramatically between 1962 and 2000. We also find that, given legal constraints that effectively prohibited the holding of stocks as reserves for pension plans, there is no equity premium puzzle in the postwar period. The average returns on debt and equity are as theory predicts.

Suggested Citation

  • Ellen R. McGrattan & Edward C. Prescott, 2001. "Taxes, regulations, and asset prices," Working Papers 610, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:610
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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