Capital Trading, Stock Trading, and the In°ation Tax on Equity¤

Abstract: A market for used capital goods, or ¯nancial instruments that represent the ownership of the used capital goods, induces in°ation taxes on wealth and on the nominal income °ows they provide. This paper explicitly introduces trading in either used capital goods or ¯nancial instruments into the standard stochastic growth model with money and production. These two monetary economies are equivalent. The value of the ¯rm is equal to the ¯rm's capital stock divided by in°ation. The resulting asset-pricing conditions indicate that the e®ect of in°ation on asset returns di®ers from the e®ects found in the literature by the addition of a signi¯cant wealth tax