Inflation Non-neutralities and the Response of Interest Rates to Inflation Expectations

Laurence Meyer and Anandi Sahu
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Laurence Meyer: Washington University
Anandi Sahu: Oakland University

Eastern Economic Journal, 1995, vol. 21, issue 1, 67-81

Abstract: This paper develops a macroeconomic model of the response of interest rates to inflation expectations, with particular attention to the role of tax non-neutralities. Virtually all the well-known results in the theoretical literature hold as special cases of this model. Some suggestive empirical evidence is presented for the general case. Inflation drives a wedge between the real cost of capital to firms and the real return to savers. The inflation non-neutralities are shown to cause the real cost of capital to firms to rise, discouraging investment, and the after-tax real interest rate to savers to fall, discouraging saving. However, the magnitude of the effect on the cost of capital appears to be very small.

Keywords: Inflation; Interest Rates; Interest; Macroeconomics (search for similar items in EconPapers)
JEL-codes: E31 E43 (search for similar items in EconPapers)
Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:eej:eeconj:v:21:y:1995:i:1:p:67-81

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