Inflation Non-neutralities and the Response of Interest Rates to Inflation Expectations
This 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.
Volume (Year): 21 (1995)
Issue (Month): 1 (Winter)
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