The Impact of Inflation on the Aggregate Debt-Asset Ratio

Authors

  • SHALOM HOCHMAN,

  • ODED PALMON

    Search for more papers by this author
    • Department of Finance, University of Houston-University Park and Departments of Economics, University of Houston and Haifa University, respectively. We would like to thank John Crockett, Paul Horvitz, Dan Levin, Rich Pettit, Ramon Rabinovitch, and Ron Singer for helpful comments.

ABSTRACT

This paper demonstrates that, contrary to the results of previous studies, the impact of inflation on the aggregate debt-asset ratio cannot be determined theoretically. However, it is shown that inflation is likely to increase this ratio when personal income tax schedules are indexed to the price level and/or when leverage-related costs are relatively high and the personal tax rate on income from holding common stocks is relatively low.

Ancillary