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Excess Capital Flows and the Burden of Inflation in Open Economies

  • Mihir A. Desai
  • James R. Hines Jr.

This paper estimates the efficiency consequences of interactions between nominal tax systems and inflation in open economies. Domestic inflation changes after-tax real interest rates at home and abroad, thereby stimulating international capital movement and influencing domestic and foreign tax receipts, saving, and investment. The efficiency costs of inflation-induced international capital reallocations are typically much larger than those that accompany inflation in closed economies, even if capital is imperfectly mobile internationally. Differences between inflation rates are responsible for international capital movements and accompanying deadweight losses, suggesting that international monetary coordination has the potential to reduce the inefficiencies associated with inflation-induced capital movements.

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File URL: http://www.nber.org/papers/w6064.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6064.

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Date of creation: Jun 1997
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Publication status: published as The Costs and Benefits of Price Stability. Feldstein, Martin, ed., Chicago: The University of Chicago Press, 1999, pp. 235-268.
Handle: RePEc:nbr:nberwo:6064
Note: ME PE
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  26. Shang-Jin Wei & David C. Parsley, 1995. "Purchasing Power Disparity During the Floating Rate Period: Exchange Rate Volatility, Trade Barriers and Other Culprits," NBER Working Papers 5032, National Bureau of Economic Research, Inc.
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