Inflation, Human Capital and Tobin's q

Parantap Basu (), Max Gillman and Joseph Pearlman
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Parantap Basu: Durham University

No 1017, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: A less well-known empirical finding for the US and UK is a pronounced low frequency negative relationship between inflation and Tobin's q; a normalized market price of capital. This stylized fact is explained within a dynamic stochastic general equilibrium model using three key features: (i) a Lucas and Prescott (1971) physical capital adjustment cost with a rising marginal cost of investment, (ii) production of human capital with endogenous growth and (iii) an inflation tax cash-in-advance economy. The baseline endogenous growth model matches the US inflation and q long term correlation, while comparable exogenous growth are unable to do this, and it outperforms the exogenous growth models in explaining business cycle volatilities of q and of stock returns.

Keywords: Low frequency, Tobin's q; inflation tax, endogenous growth (search for similar items in EconPapers)
JEL-codes: E31 E44 G12 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2010-09
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-fdg, nep-hrm and nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Inflation, human capital and Tobin's q (2012)
Working Paper: Inflation, Human Capital and Tobin's q (2009)
Working Paper: Inflation, Human Capital and Tobin's q (2009)
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