| Abstract: |
Investment and growth are found empirically to be negatively affected by
inflation. Yet evidence also supports a positive Tobin effect whereby greater
capital intensities and lower real interest rates result. The negative
investment and positive capital intensity effects appear hard to reconcile. We
present a model with both effects by requiring investment to be exchanged for,
rather than frictionlessly being acquired, so that an inflation tax lowers
investment but still induces a reallocation of factor inputs from labor
towards capital. Thereby the economy captures the investment, Tobin and growth
effects simultaneously. |