In the late 1970s, many economists argued that the deleterious effects of inflation on the user cost of capital for U.S. firms were large. Since that time, the tax code has changed, the level of inflation has dropped significantly, and the of investment has evolved considerably. In this paper, we demonstrate that the net effect of these changes has--under reasonable assumptions--not relegated inflation to the sidelines. Indeed, we conclude that: (1) inflation, even at its relatively low current rates, continues to increase the user cost of capital significantly; (2) the marginal gain in investment in response to a percentage-point reduction in inflation is larger for lower levels of inflation; (3) the beneficial effects for steady-state consumption of lowering inflation even further than has been achieved to date would likely be significant; and (4) inflation has only a small impact on intratemporal distortion in the allocation of capital within the domestic business sector. We also show that the magnitude of the inflation effect on the user cost of capital is likely much smaller in open economies.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6046.
Length: Date of creation: Aug 1999 Date of revision: Publication status: published as The Costs and Benefits of Price Stability, Feldstein, Martin, ed., pp. 199- 233. (Chicago: Universiy of Chicago Press, 1999). Handle: RePEc:nbr:nberwo:6046
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Find related papers by JEL classification: E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
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Michael P. Devereux & R. Glenn Hubbard, 2000.
"Taxing Multinationals,"
NBER Working Papers
7920, National Bureau of Economic Research, Inc.
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