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In an earlier paper published in this journal, Michael Bond and Gerald Smolen (1986) set out to test for the presence of the Darby‐Feldstein effect. They regressed the nominal rate of taxable long‐term securities on the nominal yield of long‐term tax exempt municipal securities. They conclude that the parameter for the explanatory variable, which is significantly greater than one, serves as proof of the Darby‐Feldstein effect. In addition, the authors maintain that this approach yields the prospects of an inverted Fisher condition irrelevant.

William Gissy (1987) is absolutely correct when he asserts that the existence of a complete inverted Fisher Effect renders our test for the Darby Effect a simple measure of tax arbitrage. His mathematical development of this is well done and completely valid. Our statement on page 59 of our article (1986) that “it is irrelevant whether movements in expected inflation are reflected primarily in nominal rates or real rates” should have pointed out that, in the case of an inverted Fisher Effect, the statistical analysis does not measure the Darby‐Feldstein Effect. We do, however, have a few differences with the above point of view.

According to independently developed hypotheses by Michael Darby (1975) and Martin Feldstein (1976) nominal interest rates will increase during an inflationary period by an amount which is greater than the expected rate of inflation. This occurs in order to compensate lenders for the expected loss of principal and for the taxation of the interest earned. While many authors comment on the plausibility of the Darby‐Feldstein effect, it has been difficult to support this hypotheses empirically.

At the height of the recession in the early 1980s, a multitude of state and locally sponsored housing finance agency programs were legislatively introduced in response to populist pressure. Many of these controversial programs utilized lower cost municipal bonds to subsidize private sector housing programs and had remarkable diversity in their stated objectives. This study focuses on one of these programs, the Ohio Housing Finance Program, which purported to address the needs of mainly first‐time home buyers. Housing program evaluations,while rarely done, are very important where publicborrowing is used to support them. Using county‐level demographic data for 1983, the empirical results suggest that the Ohio program’s target clientele, first time homebuyers, were the major beneficiaries of the program.