Are Tax Effects Important in the Long-Run Fisher Relationship? Evidence from the Municipal Bond Market

Are nominal bonds appropriately discounted for taxes? Empirical estimates of the response of nominal interest rates to changes in inflation, the Fisher effect, have failed to produce a definitive answer. Four reasons have been put forward as possible explanations: (i) Tobin effects, (ii) fiscal illu...

Full description

Saved in:
Bibliographic Details
Published in:The Journal of finance (New York) 1999-02, Vol.54 (1), p.307-317
Main Authors: Crowder, William J., Wohar, Mark E.
Format: Article
Language:English
Subjects:
Economic theory
Estimated taxes
Estimators
Fisher effect
Income taxes
Inflation
Inflation rates
Interest rates
Maximum likelihood estimation
Municipal bonds
Nominal interest rates
Rates of return
Shorter Papers
Studies
Tax rates
United States Treasury bills
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Are nominal bonds appropriately discounted for taxes? Empirical estimates of the response of nominal interest rates to changes in inflation, the Fisher effect, have failed to produce a definitive answer. Four reasons have been put forward as possible explanations: (i) Tobin effects, (ii) fiscal illusion, (iii) peso problems, and (iv) different estimators. Utilizing data on taxable and tax-exempt bond interest rates and several different estimators, we find that the Fisher effect estimates are always larger for the taxable bond relative to the tax-exempt bond, suggesting that fiscal illusion and different estimators cannot account for the previous results.
ISSN:0022-1082
1540-6261
DOI:10.1111/0022-1082.00105