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Inflation, Human Capital and Tobin's q

Author Info

Listed author(s):
  • Parantap Basu

    ()

    (Durham University)

  • Max Gillman

    ()

    (Institute of Economics - Hungarian Academy of Sciences, Cardiff University)

  • Joseph Pearlman

    ()

    (London Metropolitan University)

Abstract

A less well-known empirical finding for the US and UK is a pronounced low frequency negative relationship between inflation and Tobin's q; a normalized market price of capital. This stylized fact is explained within a dynamic stochastic general equilibrium model using three key features: (i) a Lucas and Prescott (1971) physical capital adjustment cost with a rising marginal cost of investment, (ii) production of human capital with endogenous growth and (iii) an inflation tax cash-in-advance economy. The baseline endogenous growth model matches the US inflation and q long term correlation, while comparable exogenous growth are unable to do this, and it outperforms the exogenous growth models in explaining business cycle volatilities of q and of stock returns.

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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 1017.

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Length: 42 pages
Date of creation: Sep 2010
Handle: RePEc:has:discpr:1017
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Keywords: Low frequency; Tobin's q; inflation tax; endogenous growth;

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Find related papers by JEL classification:
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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Cited by:

  1. Augustin Kwasi Fosu & Yoseph Getachew & Thomas H.W. Ziesemer, 2014. "Optimal Public Investment, Growth, and Consumption: Fresh Evidence from African Countries," Working Papers 201464, University of Pretoria, Department of Economics.
  2. Laszlo A. Koczy & Martin Strobel, 2010. "The World Cup of Economics Journals: A Ranking by a Tournament Method," IEHAS Discussion Papers 1018, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  3. Basu, Parantap & Getachew, Yoseph, 2015. "An adjustment cost model of social mobility," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 177-190.
  4. Yoseph Yilma Getachew & Keshab Bhattarai & Parantap Basu, 2012. "Capital adjustment cost and bias in income based dynamic panel models with fixed effects," Working Papers 2012_07, Durham University Business School.
  5. Parantap Basu, 2014. "Quantitative Easing in an Endogenous Growth Model," CEGAP Working Papers 2014_01, Durham University Business School.
  6. Basu, Parantap & Bhattarai, Keshab, 2011. "Government bias in education, schooling attainment and growth," MPRA Paper 31791, University Library of Munich, Germany.

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