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Are Tax Effects Important in the Long‐Run Fisher Relationship? Evidence from the Municipal Bond Market
Author(s) -
Crowder William J.,
Wohar Mark E.
Publication year - 1999
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00105
Subject(s) - taxable income , economics , bond , econometrics , inflation (cosmology) , fisher hypothesis , estimator , nominal interest rate , interest rate , monetary economics , bond market , real interest rate , statistics , mathematics , accounting , finance , physics , theoretical physics
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.