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The non-neutrality of inflation for international capital movements

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  • Sinn, Hans-Werner

Abstract

This paper studies the question of how unilateral changes in the rate of inflation affect the international allocation of capital. Presenting a model that incorporates a transaction motive for money holding and capital income taxation with historical cost accounting, it counters the view that inflation will be neutral in a world of perfect foresight and costless arbitrage: under mild conditions, domestic inflation will unambiguously induce a capital export. The paper includes a discussion of the Fisher effect. The empirical observation of a less than one-to-one translation of inflation into nominal interest rates is shown to be compatible with the model, and in fact the capital export turns out to be stronger the lower the degree of translation.
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Suggested Citation

  • Sinn, Hans-Werner, 1991. "The non-neutrality of inflation for international capital movements," European Economic Review, Elsevier, vol. 35(1), pages 1-22, January.
    • Handle: RePEc:eee:eecrev:v:35:y:1991:i:1:p:1-22
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    Cited by:

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    3. Mihir A. Desai & James R. Hines, Jr., 1999. "Excess Capital Flows and the Burden of Inflation in Open Economies," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 235-272, National Bureau of Economic Research, Inc.
    4. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI).
    5. Bayoumi, Tamim & Gagnon, Joseph, 1996. "Taxation and inflation: A new explanation for capital flows," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 303-330, October.

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