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The welfare gain from the introduction of indexed bonds

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  • Alan D. Viard

Abstract

I examine the welfare gain from the introduction of indexed bonds in zero net supply. I show that trade in indexed bonds enables investors to reallocate existing economic risks in a mutually beneficial manner. The aggregate gain from the introduction of a safe asset is proportional to the variance of the minimum-variance portfolio formed from the risky assets and to the heterogeneity of investors' risk preferences. In an economy with nominal but not indexed bonds, the welfare loss from inflation uncertainty is lowest when inflation is most closely correlated with real returns on other assets. Contrary to popular intuition, the introduction of indexed bonds may reduce saving. Copyright 1993 by Ohio State University Press.

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Bibliographic Info

Article provided by Federal Reserve Bank of Cleveland in its journal Proceedings.

Volume (Year): (1993)
Issue (Month): ()
Pages: 612-635

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Handle: RePEc:fip:fedcpr:y:1993:p:612-635

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Keywords: Bonds ; Inflation (Finance);

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Cited by:
  1. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, . "The Role of Real Annuities and Indexed Bonds In An Individual Accounts Retirement Program," Pension Research Council Working Papers 99-2, Wharton School Pension Research Council, University of Pennsylvania.
  2. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a central bank perspective," Banco de Espa�a Occasional Papers 0705, Banco de Espa�a.
  3. John Y. Campbell & Luis M. Viceira, 1998. "Who Should Buy Long-Term Bonds?," NBER Working Papers 6801, National Bureau of Economic Research, Inc.
  4. Peters, David W., 2007. "The behavior of government of Canada real return bond returns," International Review of Financial Analysis, Elsevier, Elsevier, vol. 16(2), pages 152-171.
  5. David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance, EconWPA 0501009, EconWPA.

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