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EC0'\lOY\liIC ~ESEARCH L~~~ DEP,fl,RTMENT OF ECONOMICS (1980)
BibTeX
@MISC{Summers80ec0'\loy\liic~esearch,
author = {Lawrence H. Summers and Untve~t Rn Minnesota and Stanley Fischer and David Lipton and Professor Lawrence and H. Summers},
title = {EC0'\lOY\liIC ~ESEARCH L~~~ DEP,fl,RTMENT OF ECONOMICS},
year = {1980}
}
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Abstract
This paper examines the role of taxation and inflation in determining the market valuation of corporate capital and the level of investment. It extends previous work on the q theory of investment by incorporating the effects of taxes levied at the individual level and by focusing on the impact of inflation. The q theoretic approach makes it possible to study the effect of policy announcements and of temporary policies. The resulting model of the investment process is immune from the "Lucas critique". The estimated relationships are technological and independent of the choice of policy rule. The empirical results indicate that tax policy and inflation have potent effects on both the stock market and investment. These effects depend critically on whether or not policy is announced in advance. Simulations based on q investment equations indicate that an increase in the rate of inflation from 0 to 8 percent would cause an immediate 23 percent decline in the stock market, and a 35 percent increase in the capital stock. Changes in tax policy also have a large effect. The estimated speed of adjustment of the capital stock is surprisingly slow, with less than half the adjustment occurring within 10 years following typical shocks.
Keyphrases
esearch dep capital stock tax policy stock market corporate capital individual level investment equation temporary policy investment process estimated speed percent decline empirical result policy rule policy announcement percent increase large effect theoretic approach typical shock previous work lucas critique market valuation
