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Inflation, Human Capital and Tobin's q

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  • Parantap Basu

    (Durham University)

  • Max Gillman

    (Institute of Economics - Hungarian Academy of Sciences, Cardiff University)

  • Joseph Pearlman

    (London Metropolitan University)

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.

Suggested Citation

  • Parantap Basu & Max Gillman & Joseph Pearlman, 2010. "Inflation, Human Capital and Tobin's q," CERS-IE WORKING PAPERS 1017, Institute of Economics, Centre for Economic and Regional Studies.
    • Handle: RePEc:has:discpr:1017
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    Cited by:

    1. Basu, Parantap & Bhattarai, Keshab, 2011. "Government bias in education, schooling attainment and growth," MPRA Paper 31791, University Library of Munich, Germany.
    2. Szilard Benk & Tamas Csabafi & Jing Dang & Max Gillman & Michal Kejak, 2016. "Tuning in RBC Growth Spectra," IMF Working Papers 2016/215, International Monetary Fund.
    3. Fosu, Augustin Kwasi & Getachew, Yoseph Yilma & Ziesemer, Thomas H.W., 2016. "Optimal Public Investment, Growth, And Consumption: Evidence From African Countries," Macroeconomic Dynamics, Cambridge University Press, vol. 20(8), pages 1957-1986, December.
    4. Augustin Kwasi Fosu & Yoseph Getachew & Thomas H.W. Ziesemer, 2014. "Optimal Public Investment, Growth, and Consumption: Fresh Evidence from African Countries," Working Papers 201464, University of Pretoria, Department of Economics.
    5. Laszlo A. Koczy & Martin Strobel, 2010. "The World Cup of Economics Journals: A Ranking by a Tournament Method," CERS-IE WORKING PAPERS 1018, Institute of Economics, Centre for Economic and Regional Studies.
    6. Parantap Basu & Keshab Bhattarai, 2012. "Government Bias in Education, Schooling Attainment, and Long‐Run Growth," Southern Economic Journal, John Wiley & Sons, vol. 79(1), pages 127-143, July.
    7. Basu, Parantap & Getachew, Yoseph, 2015. "An adjustment cost model of social mobility," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 177-190.
    8. Yoseph Yilma Getachew & Keshab Bhattarai & Parantap Basu, 2012. "Capital adjustment cost and bias in income based dynamic panel models with fixed effects," Working Papers 2012_07, Durham University Business School.
    9. Parantap Basu, 2014. "Quantitative Easing in an Endogenous Growth Model," CEMAP Working Papers 2014_01, Durham University Business School.

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    More about this item

    Keywords

    Low frequency; Tobin's q; inflation tax; endogenous growth;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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