title: Inflation, taxation, risk and capital markets: portfolio asset allocation between housing and manufacturing capital in the U.K
Creators: name: Anderson, Graeme David Waddell
Publisher: name: University of Glasgow
Year: 1992
Subjects: subject: Economics.

description: The role of owner occupied housing and manufacturing industry have been both high profile and controversial topics, particularly over the last decade. The present study attempts to identify and evaluate the effect of government taxation policy, inflation, risk and capital markets on individuals long run allocation of resources between these sectors. The majority of economic literature, particularly in the U.K., focuses on these sectors in isolation and is often (especially in housing studies) interested in the short to medium run implications. The first part of the study (Chapter 1) identifies various key investment rules to which our model can appeal. In order to expose the factors outlined above the investment hurdle has been formulated within the confines of the user cost of capital theory. Economic and institutional conditions prevalent in the period 1965 to 1979 were imposed on the basic portfolio model which is a two sector multi-equation general equilibrium model whose output determines asset allocation, real user cost of capital and real cash flows (Chapter 2). Plausible data estimates were calculated, or where econometrically derived estimates were necessary, these were obtained from relevant empirical studies (Chapter 3). The model is subjected to sensitivity analysis and then we apply growth, general and relative price inflation and finally mortgage rationing (Chapter 4). These simulations culminate to produce conditions which are similar to those actually experienced during the period of interest. Principal results of interest of the model are portfolio asset allocations, user costs of capital, the mortgage loan to valuation ratio and real cash flows. Output may also be obtained for required rates of return, risk premia and the effects of the mortgage capital market. The study finds that, in the long run, portfolio shifts occur away from manufacturing assets towards owner occupied housing in the presence of general and relative house price inflation. Mortgage rationing on the other hand offsets much, though not all, of this bias. We then adjust the model by fixing the risk free rate of interest. We also reduce both the relative real house price inflation and manufacturing equity variance which were a particular feature of this period in order to provide us with a long run model with which we may regard as a base for comparison in the following Chapter. The model is utilised to trace the effects of variant tax policies under identical inflation and capital market conditions (Chapter 5) in order to suggest methods of compensating or eliminating the above bias. This is of particular interest, as the identification and evaluation of the long run indirect as well as direct effects of government policy (taxation and capital market influence), under alternative economic environments, is a prerequisite for informed policy prescription. Two policies are directed at owner occupied housing and two at manufacturing. All policies are designed to encourage portfolio switching towards manufacturing. We present and assess each policies effectiveness under various economic conditions. Finally, we discuss our results in the context of the U.K. literature and suggest areas of further research to which our model may be applied (Chapter 6).