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The Non-Neutrality of Inflation for International Capital Movements

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  • Hans-Werner Sinn

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.

Suggested Citation

  • Hans-Werner Sinn, 1990. "The Non-Neutrality of Inflation for International Capital Movements," NBER Working Papers 3219, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3219
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    Cited by:

    1. Tamim Bayoumi & Joseph E. Gagnon, 1992. "Taxation and inflation: a new explanation for current account imbalances," International Finance Discussion Papers 420, Board of Governors of the Federal Reserve System (U.S.).
    2. Frank Strobel, 2005. "International tax arbitrage, financial parity conditions and preferential capital gains taxation," Quantitative Finance, Taylor & Francis Journals, vol. 5(2), pages 219-226.
    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. 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.
    5. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI).

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