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Inflation, human capital and Tobin's q

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Author Info

  • Basu, Parantap
  • Gillman, Max
  • Pearlman, Joseph

Abstract

A strong US postwar low frequency negative correlation exists between inflation and Tobin's q. To explain this, a production-based monetary asset pricing model is formulated with a rising marginal cost of investment, cash-in-advance and human capital based endogenous growth. Higher money supply growth causes higher inflation, lower output growth, and a lower q in the long run. The baseline model simulates well correlations of the US inflation rate and Tobin's q at each frequency of high, business cycle, low, and the “medium term.” It also performs well in correlations and volatilities compared to related exogenous growth versions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 7 ()
Pages: 1057-1074

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:7:p:1057-1074

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Tobin's q; Low frequency; Endogenous growth;

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References

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  1. Charles Nolan & Christoph Thoenissen, 2008. " Financial shocks and the US business cycle," CDMA Working Paper Series 0810, Centre for Dynamic Macroeconomic Analysis.
  2. Paul Gomme & B. Ravikumar & Peter Rupert, 2011. "The Return to Capital and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 262-278, April.
  3. Lawrence Christiano & Cosmin Ilut & Roberto Motto & Massimo Rostagno, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 955, European Central Bank.
  4. Simon Price & Christoph Schleicher, 2005. "Returns To Equity, Investment And Q: Evidence From The Uk," Manchester School, University of Manchester, vol. 73(s1), pages 32-57, 09.
  5. Paul Gomme, 1991. "Money and growth revisited," Discussion Paper / Institute for Empirical Macroeconomics 55, Federal Reserve Bank of Minneapolis.
  6. Gillman, Max & Kejak, Michal, 2005. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," Cardiff Economics Working Papers E2005/15, Cardiff University, Cardiff Business School, Economics Section.
  7. Benk, Szilárd & Gillman, Max & Kejak, Michal, 2008. "US Volatility Cycles of Output and Inflation, 1919-2004: A Money and Banking Approach to a Puzzle," Cardiff Economics Working Papers E2008/28, Cardiff University, Cardiff Business School, Economics Section.
  8. Gomme, P., 1993. "Money and Growth Revisited : Measuring the Costs of Inflation in an Endogenous Growth Model," Discussion Papers dp93-03, Department of Economics, Simon Fraser University.
  9. Paul Gomme & Peter Rupert, 2005. "Theory, measurement, and calibration of macroeconomic models," Working Paper 0505, Federal Reserve Bank of Cleveland.
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Cited by:
  1. Basu, Parantap & Bhattarai, Keshab, 2011. "Government bias in education, schooling attainment and growth," MPRA Paper 31791, University Library of Munich, Germany.

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