Arbeitspapier
Optimal inflation with corporate taxation and financial constraints
How does inflation affect the investment decisions of financially constrained firms in the presence of corporate taxation? Inflation interacts with corporate taxation via the deductibility of i) capital expenditures and ii) interest payments on debt. Through the first channel, inflation increases firms' taxable profits and further distorts their investment decisions. Through the second, expected inflation affects the effective real interest rate and stimulates investment. When debt is collateralized, the second effect dominates. Therefore, present a tax-advantage to debt financing, positive long-run inflation enhances welfare by mitigating or even eliminating the investment distortion.
- Language
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Englisch
- Bibliographic citation
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Series: Sveriges Riksbank Working Paper Series ; No. 311
- Classification
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Wirtschaft
Price Level; Inflation; Deflation
Interest Rates: Determination, Term Structure, and Effects
Financial Markets and the Macroeconomy
Monetary Policy
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- Subject
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optimal monetary policy
Friedman rule
credit frictions
tax benefits of debt
- Event
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Geistige Schöpfung
- (who)
-
Finocchiaro, Daria
Lombardo, Giovanni
Mendicino, Caterina
Weil, Philippe
- Event
-
Veröffentlichung
- (who)
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Sveriges Riksbank
- (where)
-
Stockholm
- (when)
-
2017
- Handle
- Last update
-
10.03.2025, 11:43 AM CET
Data provider
This object is provided by:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Finocchiaro, Daria
- Lombardo, Giovanni
- Mendicino, Caterina
- Weil, Philippe
- Sveriges Riksbank
Time of origin
- 2017
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