Inflation and the User Cost of Capital: Does Inflation Still Matter? / Darrel Cohen, Kevin A. Hassett, R. Glenn Hubbard.

Format:

Book

Author/Creator:

Cohen, Darrel.

Contributor:

National Bureau of Economic Research.

Hassett, Kevin A.

Hubbard, R. Glenn.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6046.

NBER working paper series no. w6046

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Inflation and the User Cost of Capital

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Summary:

In the late 1970s, many economists argued that the deleterious effects of inflation on the user cost of capital for U.S. firms were large. Since that time, the tax code has changed, the level of inflation has dropped significantly, and the of investment has evolved considerably. In this paper, we demonstrate that the net effect of these changes has--under reasonable assumptions--not relegated inflation to the sidelines. Indeed, we conclude that: (1) inflation, even at its relatively low current rates, continues to increase the user cost of capital significantly; (2) the marginal gain in investment in response to a percentage-point reduction in inflation is larger for lower levels of inflation; (3) the beneficial effects for steady-state consumption of lowering inflation even further than has been achieved to date would likely be significant; and (4) inflation has only a small impact on intratemporal distortion in the allocation of capital within the domestic business sector. We also show that the magnitude of the inflation effect on the user cost of capital is likely much smaller in open economies.

Notes:

Print version record

May 1997.