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Inflation, Human Capital and Tobin's q

  • Parantap Basu

    ()

    (Durham University)

  • Max Gillman

    ()

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

  • Joseph Pearlman

    ()

    (London Metropolitan University)

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
Date of revision:
Handle: RePEc:has:discpr:1017
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