NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Non-Neutrality of Inflation for International Capital Movements

Hans-Werner Sinn

NBER Working Paper No. 3219 (Also Reprint No. r1577)
Issued in January 1990
NBER Program(s):   ITI   IFM

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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Document Object Identifier (DOI): 10.3386/w3219

Published: European Economic Review, Vol. 34, pp. 1-22, (1991). citation courtesy of

 
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