Tax, Credit Constraints, and the Big Costs of Small Inflation
AbstractThis paper develops an overlapping generations model incorporating credit constraints, owner-occupier and rental sectors, and detailed tax regulations to examine how the interaction of inflation and the tax system affect the housing market. It shows that even modest rates of inflation can have very large effects on the home-ownership rates of young households, particularly at low real interest rates. This occurs even if there is a large supply response in the quantity of housing. The model suggests that the welfare costs of inflation could be ameliorated by exempting the inflation component of interest payments from income tax.
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Bibliographic InfoPaper provided by Motu Economic and Public Policy Research in its series Working Papers with number 08_14.
Length: 44 pages
Date of creation: Dec 2008
Date of revision:
Inflation; credit constraints; capital income taxes; housing markets; home-ownership rates; monetary policy;
Find related papers by JEL classification:
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-01-17 (All new papers)
- NEP-CBA-2009-01-17 (Central Banking)
- NEP-DGE-2009-01-17 (Dynamic General Equilibrium)
- NEP-MAC-2009-01-17 (Macroeconomics)
- NEP-MON-2009-01-17 (Monetary Economics)
- NEP-URE-2009-01-17 (Urban & Real Estate Economics)
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