Capital Trading, Stock Trading, and the Inflation Tax on Equity: A Note
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 γ in the Chami et al paper) exceeds 2.
Keywords: used-capital market, indeterminacy
JEL Codes: C68, E32, E44
Suggested citation: Baier, Scott, Charles Carlstrom, Ralph Chami, Thomas Cosimano, Timothy Fuerst, and Collen Fullenkamp, 2003. "Capital Trading, Stock Trading, and the Inflation Tax on Equity: A Note,” Federal Reserve Bank of Cleveland, Working Paper, no. 03-21.