Degrees of tax indexation and nominal interest rates: Effects of inflation on incentives to save and invest |
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Authors: | Anandi P. Sahu |
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Affiliation: | (1) School of Business Administration, Oakland University, Rochester, MI 48309, USA |
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Abstract: | This paper examines the effects of inflation expectations on nominal interest rates, and incentives to save and invest under partial and complete tax indexation schemes. One would expect that a partially indexed structure would be better than a non-indexed system. However, this is not the case—it reduces the adverse effects of inflation on the incentives to save, but accentuates them on the incentives to invest. Moreover, a change from a non-indexed tax structure to a fully-indexed structure will, ceteris paribus, lead to lower equilibrium interest rates, whereas a switch to a partially indexed system will imply higher rates. |
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Keywords: | Inflation expectations Tax indexation Nominal interest rates |
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