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Inflation, the Interest Rate, and the Required Return on Equity

Published online by Cambridge University Press:  06 April 2009

Jeffrey F. Jaffe
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Abstract

Miller has analyzed capital structure in the presence of both corporate and personal taxes. The present work investigates the effect of inflation on both interest rates and equity returns when the Miller equilibrium condition is employed in a loanable funds model. Both an interest rate effect and a redistribution effect are derived. The interest rate effect forces the responsiveness of the interest rate to the inflation rate to be below that hypothesized by Darby. However, the redistribution effect may change this responsiveness in either direction.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 20 , Issue 1 , March 1985 , pp. 29 - 44
Copyright
Copyright © School of Business Administration, University of Washington 1985

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