Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/189926
Authors: 
Finocchiaro, Daria
Lombardo, Giovanni
Mendicino, Caterina
Weil, Philippe
Year of Publication: 
2017
Series/Report no.: 
Sveriges Riksbank Working Paper Series 311
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

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.