TY - JOUR AU - Cohen, Darrel AU - Hassett, Kevin A AU - Hubbard, R. Glenn TI - Inflation and the User Cost of Capital: Does Inflation Still Matter? JF - National Bureau of Economic Research Working Paper Series VL - No. 6046 PY - 1997 Y2 - May 1997 DO - 10.3386/w6046 UR - http://www.nber.org/papers/w6046 L1 - http://www.nber.org/papers/w6046.pdf N1 - Author contact info: Darrel Cohen Kevin Hassett American Enterprise Institute 1150 Seventeenth Street, N.W. Washington, DC 20036 E-Mail: khassett@aei.org R. Glenn Hubbard Graduate School of Business Columbia University, 607 Uris Hall 3022 Broadway New York, NY 10027 Tel: 212/854-3493 Fax: 212/864-6184 E-Mail: rgh1@columbia.edu M1 - published as Darrel Cohen, Kevin Hassett, R. Glenn Hubbard. "Inflation and the User Cost of Capital: Does Inflation Still Matter?," in Martin Feldstein, editor, "The Costs and Benefits of Price Stability" University of Chicago Press (1999) AB - In the late 1970s, many economists argued that the deleterious effects of inflation on the user cost of capital for U.S. firms were large. Since that time, the tax code has changed, the level of inflation has dropped significantly, and the of investment has evolved considerably. In this paper, we demonstrate that the net effect of these changes has--under reasonable assumptions--not relegated inflation to the sidelines. Indeed, we conclude that: (1) inflation, even at its relatively low current rates, continues to increase the user cost of capital significantly; (2) the marginal gain in investment in response to a percentage-point reduction in inflation is larger for lower levels of inflation; (3) the beneficial effects for steady-state consumption of lowering inflation even further than has been achieved to date would likely be significant; and (4) inflation has only a small impact on intratemporal distortion in the allocation of capital within the domestic business sector. We also show that the magnitude of the inflation effect on the user cost of capital is likely much smaller in open economies. ER -