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Indexed Units of Account: Theory and Assessment of Historical Experience

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Abstract

An indexed unit of account is a money analogue, used to express prices; the unit's purchasing power is defined by an index. Indexed units of account are not true money in that they are not used as a medium of exchange. The first successful indexed unit of account, the Unidad de Fomento (UF) has been used in Chile since 1967, and has been copied in Colombia, Ecuador, Mexico, and Uruguay. The reasons for creating such units are discussed from the standpoint of monetary theory. The experience with such units in Chile is discussed. It is argued that important practical problems in implementing indexation are solved by creating such indexed units of account. The author advocates creating such units in other countries, even countries with relatively low rates of inflation such as the United States, and argues that an alternative definition of the units, relating the units to measures of income, may also be advantageous. Ideally, such indexed units of account might someday be "monetized," i.e., institutions such as debit cards may be devised to allow the units to be used for all transactions, so that the role of conventional money might be reduced to clearing-house functions only.

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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1171.

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Length: 28 pages
Date of creation: Feb 1998
Date of revision:
Publication status: Published in F. Lefort, K. Schmidt-Hebbel, and N. Loayza (eds.), Indexation, Inflation and Monetary Policy, Vol. 2, Central Bank of Chile, 2002, pp. 105-134
Handle: RePEc:cwl:cwldpp:1171

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Keywords: Unidad de Fomento; money of account; ghost money; imaginary money; indexation; monetary theory; escalator clause; cost of living allowance; inflation; consumer price index; personal income; wage; salary; social security; pension; overlapping generations; Chile;

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References

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  1. Michael D. Bordo & Anna J. Schwartz, 1987. "The ECU - An Imaginary or Embryonic Form of Money: What Can We Learn from History?," NBER Working Papers 2345, National Bureau of Economic Research, Inc.
  2. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Data," Harvard Institute of Economic Research Working Papers 1758, Harvard - Institute of Economic Research.
  3. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," NBER Working Papers 5587, National Bureau of Economic Research, Inc.
  4. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
  5. David Card & Dean Hyslop, 1996. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Working Papers 5538, National Bureau of Economic Research, Inc.
  6. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  7. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Ghost Money: Chile's Unidad de Fomento
    by JP Koning in Moneyness on 2013-09-23 14:57:00
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Cited by:
  1. de Boyer des Roches, Jérôme & Gomez Betancourt, Rebeca, 2013. "Origins and developments of Irving Fisher's compensated dollar plan," Economics Papers from University Paris Dauphine 123456789/11492, Paris Dauphine University.
  2. Halabi, Claudia E. & Lastrapes, William D., 2003. "Estimating the liquidity effect in post-reform Chile: do inflationary expectations matter?," Journal of International Money and Finance, Elsevier, vol. 22(6), pages 813-833, November.
  3. Robert J. Shiller, 1999. "Designing Indexed Units of Account," NBER Working Papers 7160, National Bureau of Economic Research, Inc.
  4. Ould Ahmed, Pepita & Marques-Pereira, Jaime & Le Maux, Laurent & Desmedt, Ludovic & Blanc, Jerome & Théret, Bruno, 2013. "Monetary plurality in economic theory," Economics Papers from University Paris Dauphine 123456789/11496, Paris Dauphine University.
  5. Isil Erol & Kanak Patel, 2004. "Housing Policy and Mortgage Finance in Turkey During the Late 1990s Inflationary Period," International Real Estate Review, Asian Real Estate Society, vol. 7(1), pages 98-120.
  6. Hovanov, Nikolai V. & Kolari, James W. & Sokolov, Mikhail V., 2004. "Computing currency invariant indices with an application to minimum variance currency baskets," Journal of Economic Dynamics and Control, Elsevier, vol. 28(8), pages 1481-1504, June.
  7. Solange Berstein & Rómulo Chumacero, 2005. "Cuantificación de los Costos de los Limites de Inversión para los Fondos de Pensiones Chilenos," Working Papers 3, Superintendencia de Pensiones, revised Apr 2005.

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