Inflation, Real Estate and Stock Prices: Evidence from West-Germany

Abstract: In this paper we analyse the influence of inflation on stock and real estate prices in two different models. Both models predict a decline of deflated stock prices and an increase of real house prices as a consequence of inflation. The first model emphasizes the role of taxation of inflationary profits. In the second model the influence of inflation on asset prices is explained by differences in the financing structure of the real estate and the goods sector. We find strong evidence in favour of the hypothesis that the financing structure is dominant in determining the influence of inflation on asset prices.