Inflation Non-neutralities and the Response of Interest Rates to Inflation Expectations
AbstractThis paper develops a macroeconomic model of the response of interest rates to inflation expectations, with particular attention to the role of tax non-neutralities. Virtually all the well-known results in the theoretical literature hold as special cases of this model. Some suggestive empirical evidence is presented for the general case. Inflation drives a wedge between the real cost of capital to firms and the real return to savers. The inflation non-neutralities are shown to cause the real cost of capital to firms to rise, discouraging investment, and the after-tax real interest rate to savers to fall, discouraging saving. However, the magnitude of the effect on the cost of capital appears to be very small.
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Bibliographic InfoArticle provided by Eastern Economic Association in its journal Eastern Economic Journal.
Volume (Year): 21 (1995)
Issue (Month): 1 (Winter)
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Inflation; Interest Rates; Interest; Macroeconomics;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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