Hostname: page-component-78c5997874-ndw9j Total loading time: 0 Render date: 2024-11-20T04:15:56.070Z Has data issue: false hasContentIssue false
  • English
  • Français

Inflation and Asset Life: The Darby versus the Fisher Effect

Published online by Cambridge University Press:  06 April 2009

Keith M. Howe  and
Harvey Lapan
Get access Rights & Permissions [Opens in a new window]

Abstract

Our paper extends prior work on abandonment and replacement policies by analyzing the effects of both the Darby and the Fisher interest rate hypotheses. In most of the new cases developed, the effect of increased inflation on economic life is ambiguous. In the abandonment problem, we find a greater tendency under the Fisher hypothesis than under the Darby hypothesis for increased inflation to result in an extension of economic life. In contrast, for the replacement problem, there is a greater tendency under the Fisher hypothesis (than under Darby) for inflation to shorten the asset holding period.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 22 , Issue 2 , June 1987 , pp. 249 - 258
Copyright
Copyright © School of Business Administration, University of Washington 1987

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Auerbach, A. J. “Inflation and the Choice of Asset Life.” Journal of Political Economy, 87 (06 1979), 621–638.CrossRefGoogle Scholar
[2]Ayanian, R. “Expectations, Taxes, and Interest: The Search for the Darby Effect.” American Economic Review, 73 (09 1983), 762–765.Google Scholar
[3]Brenner, M., and Venezia, I.. “The Effects of Inflation and Taxes on Growth Investments and Replacement Policies.” Journal of Finance, 38 (12 1983), 1519–1528.CrossRefGoogle Scholar
[4]Cargill, T. F. “Direct Evidence of the Darby Hypothesis for the United States.” Economic Inquiry, 15 (01 1977), 132–135.CrossRefGoogle Scholar
[5]Carlson, J. A. “Expected Inflation and Interest Rates.” Economic Inquiry, 17 (10 1979), 597–608.CrossRefGoogle Scholar
[6]Carr, J.; Pesando, J. E.; and Smith, L. B.. “Tax Effect, Price Expectations and the Nominal Rate of Interest.” Economic Inquiry, 14 (06 1976), 259–269.CrossRefGoogle Scholar
[7]Darby, M. R. “The Financial and Tax Effects of Monetary Policy on Interest Rates.” Economiclnquiry, 13 (06 1975), 266–276.Google Scholar
[8]Feldstein, M. “Inflation, Taxes and the Rate of Interest: A Theoretical Analysis.” American Economic Review, 66 (12 1976), 889–920.Google Scholar
[9]Feldstein, M., and Summers, L.. “Inflation Tax Rules and Long-Term Interest Rate.” Brookings Papers on Economic Activity, 1 (1978), 61–109.CrossRefGoogle Scholar
[10]Fisher, , I. The Theory of Interest. New York: Macmillan (1930).Google Scholar
[11]Gandolfi, A. E. “Inflation, Taxation, and Interest Rates.” Journal of Finance, 37 (06 1982), 797–807.CrossRefGoogle Scholar
[12]Howe, K. M., and McCabe, G. M.. “On Optimal Asset Abandonment and Replacement.” Journal of Financial and Quantitative Analysis, 18 (09 1983), 295–305.CrossRefGoogle Scholar
[13]Jaffe, J. F. “Inflation, the Interest Rate, and the Required Return on Equity.” Journal of Financial and Quantitative Analysis, 20 (03 1985), 29–44.CrossRefGoogle Scholar
[14]Kelly, W. A. Jr., and Miles, J. A.. “Darby and Fisher: Resolution of a Paradox.” The Financial Review, 19 (03 1984), 103–110.CrossRefGoogle Scholar
[15]Miller, M. H. “Debt and Taxes.” Journal of Finance, 32 (05 1977), 261–275.Google Scholar
[16]Modigliani, F., and Miller, M.. “Corporate Income Taxes and the Cost of Capital: A Correction.” American Economic Review, 53 (06 1963), 433–443.Google Scholar
[17]Nelson, C. R. “Inflation and Capital Budgeting.” Journal of Finance, 31 (06 1976), 923–931.CrossRefGoogle Scholar
[18]Peek, J., and Wilcox, J. A.. “The Postwar Stability of the Fisher Effect.” Journal of Finance, 38 (09 1983), 1111–1124.CrossRefGoogle Scholar
[19]Tanzi, V. “Inflationary Expectations, Economic Activity, Taxes, and Interest Rates.” American Economic Review, 70 (03 1980), 12–21.Google Scholar
[20]Yun, Y. “The Effects of Inflation and Income Taxes on Interest Rates: Some New Evidence.” Journal of Financial and Quantitative Analysis, 19 (12 1984), 425–448.CrossRefGoogle Scholar