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The combination of price inflation and historical cost-based depreciation for tax purposes has been shown in the finance literature to reduce the present value of depreciation deductions. Since tax depreciation deductions are limited to a nominal dollar amount, when inflation occurs a future tax deduction has less real value. This effect is pedagogically presented in a capital budgeting context. In the economic literature Hotelling and Herfindahl have contributed models describing natural resource production changes in response to changes in demand, production cost, and cost of capital. Parts of the inflation-explicit capital budgeting model and the Hotelling and Herfindahl models are combined. The result is a partial equilibrium model which yields the conclusion that production from a natural resource is reduced if inflation is increased. Copper industry data from 1947-1978 are examined for empirical confirmation of the theoretical model. A copper industry production function, which contained demand, real price and labor strike variables, gained in descriptive capability by inclusion of inflation as an additional multiple regression variable. The dissertation reviews literature on the relationship between capital investment and inflation. The cases of hyper-inflation in Germany and medium inflation in Latin America are considered. Other literature review topics include the inflation effects in the securities markets, inflation-caused wealth transfers and inflation adjustments in accounting statements.

Thesis (M.S.)--Massachusetts Institute of Technology, Alfred P. Sloan School of Management, 1980. / MICROFICHE COPY AVAILABLE IN ARCHIVES AND DEWEY. / Bibliography: leaves 84-85. / by David Glenn Naugle. / M.S.

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The international Fisher effect is identified as part of the four-way equivalence model. This model outlines a relationship between exchange rates, interest rates and inflation rates. The international Fisher effect, specifically, states that the difference in interest rates between two countries is an indicator of the expected change in exchange rates of their currencies. The aim of this paper is to test the validity of the international Fisher effect between South Africa and the UK. The understanding of the exchange rate movements is vital for management decisions, investment activity and policy making for central banks and government. Data has been collected for a sampling period beginning in July 1995 and ending in April 2001. Interest rates in the UK and South Africa are recorded for this period. A record of exchange rate movements for the same period has also been compiled. Using this data, a simulation of an uncovered interest arbitrage was carried out. This was done by taking £100 from the UK, converting it to Rands and investing those Rands in a South African bank. At the same time, £100 was also invested in a UK bank. As interest accrued over the test period, interest rates in both countries changed, exchange rates fluctuated and the balance in the South African account was compared to the balance in the UK account. According to the model, the real balances in both the accounts should remain equivalent over the sampling period. It was found that interest rates in SA were higher, more volatile and less cyclic than those in the UK. As predicted by the model, the exchange rate (in R/£) constantly increased over the sampling period. Reasons for the higher interest rates in SA include a low national savings rate, high inflation, the South African economies vulnerability to events in the international market and the reserve bank's monetary policies. The simulated arbitrage was found to be profitless and the balances of the two simulated investment accounts were found to be statistically similar. There were, however, some short term deviations from the theory. The value of the SA account was lowest during times of high interest rates in SA, when there was volatility in the forex market and when the exchange rate was at peaks in the cycle. Nevertheless, the exchange rate - interest rate relationship always returned to equilibrium. The risk and unpredictability associated with the international market is high while only small chances exist to achieve economic gain from borrowing from low interest rate environments (or investing in countries where the interest rates are high). It was concluded that the international Fisher effect, between the UK and South Africa, for the period studied, had significant short term deviations but is valid over the medium term. The implication for business practice is that stakeholders should be conservative when faced with risk associated with foreign exchange exposure unless, as is the case with speculators, it is their core competence to predict macroeconomic trends and profit from beating the market. / Thesis (MBA)-University of Natal, Durban, 2001.

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This thesis directs attention to the way in which the economics profession has sought to explain the phenomenon of inflation. The first half is primarily a detailed survey of the mainstream postwar literature in this area. The first five chapters provide a comprehensive review and a critical reappraisal of the basic theoretical contributions of successive theorists. The second half of the thesis proposes an alternative approach built essentially upon the early ideas of the neo-Wicksellian over-investment writers and upon the underlying 'structural' model found in Keynes' Treatise on Money. The problem of whether market organization affects the relationship between inflation and the structure of output and employment is also examined, and it is found to be of little importance. The Keynes-Wicksell structural model is then tested against Canadian time-series data for the period 1924-1981. Despite uneven results, the empirical findings give definite importance to the structural variable in explaining price formation in Canada. Finally, the concluding chapter discusses some of the policy issues arising from this structural approach.

Franco Modigliani, Richard A. Cohn. / "May 1984." / Bibliography: p. 32-34.

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