Capital Trading, Stock Trading, and the Inflation Tax on Equity

Abstract

A market for used capital goods, or¯nancial instruments that represent the ownership of the used capital goods, induces in°ation taxes on wealth and on the nominal income°ows they provide. This paper explicitly introduces trading in either used capital goods or¯nancial instruments into the standard stochastic growth model with money and production. These two monetary economies are equivalent. The value of the¯rm is equal to the¯rm's capital stock divided by in°ation. The resulting asset-pricing conditions indicate that the e®ect of in°ation on asset returns di®ers from the e®ects found in the literature by the addition of a signi¯cant wealth tax.¤ We would like to thank