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NBER Working Papers and Publications
|January 1999||Inflation and the User Cost of Capital: Does Inflation Still Matter?|
with Kevin Hassett, R. Glenn Hubbard
in The Costs and Benefits of Price Stability, Martin Feldstein, editor
|May 1997||Inflation and the User Cost of Capital: Does Inflation Still Matter?|
with Kevin A. Hassett, R. Glenn Hubbard: w6046
In the late 1970s, many economists argued that the deleterious effects of inflation on the user cost of capital for U.S. firms were large. Since that time, the tax code has changed, the level of inflation has dropped significantly, and the of investment has evolved considerably. In this paper, we demonstrate that the net effect of these changes has--under reasonable assumptions--not relegated inflation to the sidelines. Indeed, we conclude that: (1) inflation, even at its relatively low current rates, continues to increase the user cost of capital significantly; (2) the marginal gain in investment in response to a percentage-point reduction in inflation is larger for lower levels of inflation; (3) the beneficial effects for steady-state consumption of lowering inflation even further than...