The Effect of Inflation on the Prices of Land And Gold

Martin Feldstein

NBER Working Paper No. 296 (Also Reprint No. r0140)
Issued in November 1978
NBER Program(s):Public Economics Program

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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Document Object Identifier (DOI): 10.3386/w0296

Published: Feldstein, Martin, "Inflation, Tax Rules, and the Prices of Land and Gold." Journal of Public Economics, Vol. 14, No. 3, (December 1980), pp. 309-317.

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