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

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  • Koka Katerina

    (Department of Economics, Brock University, 500 Glenridge Ave., St. Catharines, ON, Canada L2S 3A1)

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.

Suggested Citation

  • Koka Katerina, 2014. "Inflation effects on capital accumulation in a model with residential and non-residential assets," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 119-146, January.
    • Handle: RePEc:bpj:bejmac:v:14:y:2014:i:1:p:28:n:23
    DOI: 10.1515/bejm-2013-0149
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    More about this item

    Keywords

    housing capital; long run inflation; tenure choice;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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