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Working Paper

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

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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.
12.21.2003ISSN 2573-7953 WP 03-21DOI 10.26509/frbc-wp-200321
Keywords used-capital market, indeterminacy
JEL Classification Codes C68, E32, E44

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Baier, Scott, Charles T. Carlstrom, Ralph Chami, Thomas Cosimano, Timothy S. Fuerst, and Connel Fullenkamp. 2003. “Capital Trading, Stock Trading, and the Inflation Tax on Equity: A Note.” Federal Reserve Bank of Cleveland, Working Paper No. 03-21. https://doi.org/10.26509/frbc-wp-200321