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

Katerina Koka

The B.E. Journal of Macroeconomics, 2014, vol. 14, issue 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 non-residential 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.

Date: 2014
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DOI: 10.1515/bejm-2013-0149

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