Inflation effects on capital accumulation in a model with residential and non-residential assets

Koka, Katerina (2014): Inflation effects on capital accumulation in a model with residential and non-residential assets. Published in: BE Journal of Macroeconomics , Vol. 1, No. 14 (January 2014): pp. 1-28.

Abstract

We study aggregate effects on capital accumulation of changes in the permanent rate of inflation in a model that incorporates both residential and nonresidential capital. The framework is a dynamic general equilibrium life-cycle economy populated by heterogeneous individuals with respect to age, income and homeownership status. Inflation raises the non-residential capital income tax burden, affects the user cost of housing capital and raises the opportunity cost of holding money. A numerical analysis is provided based on parameter values from the US economy. We find that housing capital and inflation exhibit a positive correlation while inflation reduces savings in business capital. It is shown that this outcome arises from the interaction of inflation with individual tenure decisions and a number of characteristics and tax provisions available in the housing market.

• Item Type: MPRA Paper
• Language: English
• Keywords: housing capital; long run inflation; tenure choice
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation

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