Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/189926 
Year of Publication: 
2017
Series/Report no.: 
Sveriges Riksbank Working Paper Series No. 311
Publisher: 
Sveriges Riksbank, Stockholm
Abstract: 
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.
Subjects: 
optimal monetary policy
Friedman rule
credit frictions
tax benefits of debt
JEL: 
E31
E43
E44
E52
G32
Document Type: 
Working Paper

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