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Excess Capital Flows and the Burden of Inflation in Open Economies

In: The Costs and Benefits of Price Stability

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  • Mihir A. Desai
  • James R. Hines, Jr.

Abstract

This paper estimates the efficiency consequences of interactions between nominal tax systems and inflation in open economies. Domestic inflation changes after-tax real interest rates at home and abroad, thereby stimulating international capital movement and influencing domestic and foreign tax receipts, saving, and investment. The efficiency costs of inflation-induced international capital reallocations are typically much larger than those that accompany inflation in closed economies, even if capital is imperfectly mobile internationally. Differences between inflation rates are responsible for international capital movements and accompanying deadweight losses, suggesting that international monetary coordination has the potential to reduce the inefficiencies associated with inflation-induced capital movements.

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This chapter was published in:

  • Martin Feldstein, 1999. "The Costs and Benefits of Price Stability," NBER Books, National Bureau of Economic Research, Inc, number feld99-1, May.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 7775.

    Handle: RePEc:nbr:nberch:7775

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    3. Sinn, Hans-Werner, 1991. "The non-neutrality of inflation for international capital movements," European Economic Review, Elsevier, vol. 35(1), pages 1-22, January.
    4. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
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    6. Kenneth A. Froot & Michael Kim & Kenneth Rogoff, 1995. "The Law of One Price Over 700 Years," NBER Working Papers 5132, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Roger H. Gordon & James R. Hines Jr., 2002. "International Taxation," NBER Working Papers 8854, National Bureau of Economic Research, Inc.
    2. Ciżkowicz, Piotr & Rzońca, Andrzej, 2010. "Inflation and corporate investment in selected OECD countries in the years 1960-2005 – an empirical analysis," MPRA Paper 29846, University Library of Munich, Germany.
    3. Pierre Fortin & George A. Akerlof & William T. Dickens & George L. Perry, 2002. "Inflation and Unemployment in the U.S. and Canada: A Common Framework," Cahiers de recherche du Département des sciences économiques, UQAM 20-16, Université du Québec à Montréal, Département des sciences économiques.

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