Expected Inflation and the Real Rates of Interest on Taxable and Tax-Exempt Bonds.

The article analyzes the differential effect of inflation on the rates of return for taxable corporate bonds and tax-exempt municipal bonds. Empirical methods are used to examine the impact of expected inflation on rates of return on taxable bonds, common stocks, and tax-exempt municipal bonds. Results show that nominal taxable yields and tax-exempt yields respond differently to expected inflation. The subperiods of 1959-1965 and 1966-1980 are discussed in terms of the conventional "Fisher Effect."