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- Title
INFLATION, TAXES AND BANKS' MARKET VALUES.
- Authors
Dermine, Jean
- Abstract
The article discusses how the effect of taxes in an inflationary environment causes fluctuation in the market value of banks. Five major causes of fluctuation in market values are proposed, interest rate movements, liquidity crisis, credit default, variations in operating margins and fraud and failure to diversify. The market value of a financial intermediary is negatively related to the inflation rate. One will observe that this inflation effect is independent of the one due to interest rate fluctuations, although these two effects may reinforce each other in reality. A simple model of the banking firm has been developed in this article to show the negative relationship between the intermediary's market value and the inflation rate under the current tax system. The financial intermediary finances assets. A, with deposits, D and equity, E. The assets and deposits carry the current interest rate g and d respectively. The asset market is perfect so that the interest rate g is exogenous. However, the deposit market is imperfect. The deposit supply is an increasing function of the deposit rate, d. All variables are known with certainty.
- Subjects
PRICE inflation; BANKING industry; MARKET value; FAIR value; PRICE inflation &; taxation; INTEREST rates
- Publication
Journal of Business Finance & Accounting, 1985, Vol 12, Issue 1, p65
- ISSN
0306-686X
- Publication type
Article
- DOI
10.1111/j.1468-5957.1985.tb00079.x