Capital Trading, Stock Trading, and the Inflation Tax on Equity: A Note

11 Pages Posted: 2 Nov 2007

See all articles by Scott L. Baier

Scott L. Baier

Clemson University - John E. Walker Department of Economics

Charles T. Carlstrom

Federal Reserve Bank of Cleveland

Ralph Chami

International Monetary Fund (IMF)

Thomas F. Cosimano

University of Notre Dame; International Monetary Fund

Timothy S. Fuerst

University of Notre Dame

Connel Fullenkamp

Duke University - Department of Economics

Date Written: December 2003

Abstract

In "Capital Trading, Stock Trading, and the Inflation Tax on Equity," Chami, Cosimano, and Fullenkamp (2001) (hereafter, CCF) analyze a cash-in-advance model in which capital goods are explicitly traded. The authors show that there is more responsiveness of consumption and output to changes in the money supply than exists in the standard neoclassical growth models. This note demonstrates that this arises because CCF implicitly imposed an additional equilibrium restriction on the Cooley and Hansen (1989) model. This restriction can be imposed only if the Cooley and Hansen model is subject to real indeterminacy which occurs whenever the risk aversion coefficient (denoted by lambda in the CCF paper) exceeds 2.

Keywords: used-capital market, indeterminacy

JEL Classification: C68, E32, E44

Suggested Citation

Baier, Scott Leonard and Carlstrom, Charles T. and Chami, Ralph and Cosimano, Thomas F. and Fuerst, Timothy S. and Fullenkamp, Connel, Capital Trading, Stock Trading, and the Inflation Tax on Equity: A Note (December 2003). FRB of Cleveland Working Paper No. 03-21, Available at SSRN: https://ssrn.com/abstract=1026072 or http://dx.doi.org/10.2139/ssrn.1026072

Scott Leonard Baier

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States
864-656-4534 (Phone)

Charles T. Carlstrom (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States
216-579-2294 (Phone)
216-579-3050 (Fax)

Ralph Chami

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6039 (Phone)
202-623-6068 (Fax)

Thomas F. Cosimano

University of Notre Dame ( email )

513 W. Broad #704
Falls Church, VA 22046
United States
574-807-4876 (Phone)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Timothy S. Fuerst

University of Notre Dame ( email )

Notre Dame, IN 46556
United States

Connel Fullenkamp

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
(919) 660-1800 (Phone)

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