The Effect of Inflation on the Prices of Land and Gold

16 Pages Posted: 28 Dec 2006

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased); Harvard University (deceased)

Date Written: November 1978

Abstract

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.

Suggested Citation

Feldstein, Martin S., The Effect of Inflation on the Prices of Land and Gold (November 1978). NBER Working Paper No. w0296, Available at SSRN: https://ssrn.com/abstract=403380

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