The Effect of Inflation on the Prices of Land And Gold / Martin Feldstein.

By:

Feldstein, Martin

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0296.Publication details: Cambridge, Mass. National Bureau of Economic Research 1978.Description: 1 online resource: illustrations (black and white)Online resources:

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Abstract: Traditional theory implies that the relative price of consumer goods and of such real assets as land and gold should not be permanently affected by the rate of inflation. A change in the general rate of inflation should, in equilibrium, cause an equal change in the rate of inflation for each asset price The experience of the past decade has been very different from the predictions of this theory: the prices of land, gold, and other such stores of value have increased by substantially more than the general price level. The present paper presents a simple theoretical model that explains the positive relation between the rate of inflation and the relative price of such real assets. More specifically, in an economy with an income tax, an increase in the expected rate of inflation causes an immediate increase in the relative price of such 'store of value' real assets. The behavior of real asset prices discussed in this paper is thus a further example of the non-neutral response of capital markets to inflation in an economy with income taxes.

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Previous	nber w0293 Do Multinational Firms Adapt Factor Proportions To Relative Factor Prices? /	nber w0294 How Important is Disaggregation in Structural Models of Interest Rate Determination? /	nber w0295 Interest Rate Expectations Versus Forward Rates: Evidence From An Expectations Survey /	nber w0296 The Effect of Inflation on the Prices of Land And Gold /	nber w0297 A Model of Diffusion In the Production of an Innovation /	nber w0298 A Status Report on Tax Integration in the United States /	nber w0299 Labor Supply Estimates For Public Policy Evaluation /	Next

November 1978.

Traditional theory implies that the relative price of consumer goods and of such real assets as land and gold should not be permanently affected by the rate of inflation. A change in the general rate of inflation should, in equilibrium, cause an equal change in the rate of inflation for each asset price The experience of the past decade has been very different from the predictions of this theory: the prices of land, gold, and other such stores of value have increased by substantially more than the general price level. The present paper presents a simple theoretical model that explains the positive relation between the rate of inflation and the relative price of such real assets. More specifically, in an economy with an income tax, an increase in the expected rate of inflation causes an immediate increase in the relative price of such 'store of value' real assets. The behavior of real asset prices discussed in this paper is thus a further example of the non-neutral response of capital markets to inflation in an economy with income taxes.