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The Non-Neutrality of Inflation for International Capital Movements

  • Hans-Werner Sinn

This paper studies the question of how unilateral changes in the rate of inflation affect the international allocation of capital. Presenting a model that incorporates a transaction motive for money holding and capital income taxation with historical cost accounting, it counters the view that inflation will be neutral in a world of perfect foresight and costless arbitrage: under mild conditions, domestic inflation will unambiguously induce a capital export. The paper includes a discussion of the Fisher effect. The empirical observation of a less than one-to--one translation of inflation into nominal interest rates is shown to be compatible with the model, and in fact the capital export turns out to be stronger the lower the degree of translation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3219.

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Date of creation: Jan 1990
Date of revision:
Publication status: published as European Economic Review, Vol. 34, pp. 1-22, (1991).
Handle: RePEc:nbr:nberwo:3219
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