《Inflation》.pdfVIP

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Inflation, Tax Rules, and Capital Formation Volume Author/Editor: Martin Feldstein Volume Publisher: University of Chicago Press Volume ISBN: 0-226-24085-1 Volume URL: /books/feld83-1 Publication Date: 1983 Chapter Title: Inflation, Tax Rules, and the Prices of Land and Gold Chapter Author: Martin Feldstein Chapter URL: /chapters/c11337 Chapter pages in book: (p. 221 - 228) 12 Inflation, Tax Rules, and the Prices of Land and Gold 12.1 Introduction Traditional theory implies that the relative price of consumer goods and of such real assets as land and gold should not be permanently affected by the rate of inflation. A change in the general rate of inflation should, in equilibrium, cause an equal change in the rate of inflation for each asset price. The experience of the past decade has been very differ- ent from the predictions of this theory : the prices of land, gold, and other such stores of value have increased by substantially more than the general 1 price level. The present paper presents a simple theoretical model that offers an explanation of the positive relation between the rate of inflation and the relative price of such real assets. More specifically, the analysis here shows that, in an economy with an income tax, an increase in the expected rate of inflation causes an im- mediate increase in the relative price of such store of value real assets. What we have observed in the past decade can thus be understood as both (1) a series of transitions to higher relative asset prices whenever there was an increase in expected inflation, and (2) the traditional rise in these Reprinted by permission from Journal of Public Economics 14 (December 1980): 309-18. This paper is part of t