Irving Fisher long advocated inflation indexed bonds. I prove in the context of a multicommodity CAPM world that the best welfare improving bond pays the minimum money needed to achieve the same utility, and not the minimum needed to buy an ideal commodity bundle. Irving Fisher also developed and advocated the impatience theory of interest. But in OLG economies, the rate of interest is determined by population growth, not impatience. I reconcile this contradiction by proving that in stationary OLG economies with land, the interest rate at the unique steady state does depend on impatience. Indeed, the proposition that greater impatience creates higher interest rates holds more generally in OLG with land than in Fisher's two-period model.
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Length: 40 pages Date of creation: Jul 2003 Date of revision: Publication status: Published in American Journal of Economics and Sociology (2005), 64(1): 257-306 Handle: RePEc:cwl:cwldpp:1429
Find related papers by JEL classification: B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Quantitative and Mathematical B31 - Schools of Economic Thought and Methodology - - History of Thought: Individuals - - - Individuals D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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