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Inflation, human capital and Tobin's q

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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