The Effects of Inflation and Taxes on Growth Investments and Replacement Policies

Authors

  • MENACHEM BRENNER,

  • ITZHAK VENEZIA

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    • School of Business, The Hebrew University, Jerusalem, and Graduate School of Business Administration, New York, University; and School of Business, The Hebrew University, Jerusalem, and School of Business, University of California, Berkeley. We wish to thank Michael Brennan for his helpful comments and suggestions.

ABSTRACT

This paper investigates the effect of inflation and taxes on the optimal duration of investments. The main conclusion is that inflation does not always increase the duration of investments. For example, in the case of equipment with a short replacement cycle, increased inflation tends to decrease the duration of the cycle. Contrary to the common theoretical analysis, these results imply that inflation may increase some forms of capital investments.

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