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Tax, Credit Constraints, and the Big Costs of Small Inflation

  • Andrew Coleman

    ()

    (Motu Economic and Public Policy Research)

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    This paper develops an overlapping generations model incorporating credit constraints, owner-occupier and rental sectors, and detailed tax regulations to examine how the interaction of inflation and the tax system affect the housing market. It shows that even modest rates of inflation can have very large effects on the home-ownership rates of young households, particularly at low real interest rates. This occurs even if there is a large supply response in the quantity of housing. The model suggests that the welfare costs of inflation could be ameliorated by exempting the inflation component of interest payments from income tax.

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    File URL: http://motu-www.motu.org.nz/wpapers/08_14.pdf
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    Paper provided by Motu Economic and Public Policy Research in its series Working Papers with number 08_14.

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    Length: 44 pages
    Date of creation: Dec 2008
    Date of revision:
    Handle: RePEc:mtu:wpaper:08_14
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    Web page: http://www.motu.org.nzEmail:


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    1. Roger H. Gordon & James R. Hines Jr. & Lawrence H. Summers, 1986. "Notes on the Tax Treatment of Structures," NBER Working Papers 1896, National Bureau of Economic Research, Inc.
    2. Martin S. Feldstein, 1999. "Capital Income Taxes and the Benefit of Price Stability," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 9-46 National Bureau of Economic Research, Inc.
    3. Fumio Hayashi & Takatoshi Ito & Joel Slemrod, 1987. "Housing Finance Imperfections and Private Saving: A Comparative Simulation Analysis of the U.S. and Japan," NBER Working Papers 2272, National Bureau of Economic Research, Inc.
    4. Bailey, Martin J, 1974. "Progressivity and Investment Yields under U.S. Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1157-75, Nov.-Dec..
    5. Aaron, Henry J, 1976. "Inflation and the Income Tax," American Economic Review, American Economic Association, vol. 66(2), pages 193-99, May.
    6. Fischer, Stanley & Summers, Lawrence H, 1989. "Should Governments Learn to Live with Inflation?," American Economic Review, American Economic Association, vol. 79(2), pages 382-87, May.
    7. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc.
    8. Modigliani, Franco., 1974. "Some economic implications of the indexing of financial assets with special reference to mortgages," Working papers 736-74., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    9. Nowotny, Ewald, 1980. "Inflation and Taxation: Reviewing the Macroeconomic Issues," Journal of Economic Literature, American Economic Association, vol. 18(3), pages 1025-49, September.
    10. Kearl, J R, 1979. "Inflation, Mortgages, and Housing," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1115-38, October.
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