Knowledge that Transforms

A price dispersion equation is tested with data from the German hyperinflation. The equation is derived from a version of Lucas's and Barro's partial information-localized market models. In this extension, different excess demand elasticities across commodities imply a testable dispersion equation, in which the explanatory variable is the magnitude of the unperceived money growth. In order to test this hypothesis a price dispersion series is constructed, and a measure of the unperceived part of money growth is estimated. The model receives support from the empirical analysis, although it is evident that unincluded variables have important effects on price dispersion.

The demand for capital is not systematically related to either the level or the rate of change of "effective" income tax rates on corporate capital assets. Rising inflation during the last 10 years has raised the user cost of capital for durable assets relative to that for short-lived assets even though this inflation has raised effective tax rates for more durable capital less than for short-lived assets. Even with replacement-cost depreciation allowances, the level and pattern of investment incentives probably will continue to vary with the inflation rate.