Ambiguity Aversion and the Absence of Indexed Debt
AbstractInspite of wide and long-standing support among economists for indexation of loan contracts there has been relatively little use of indexation, except in situations of extremely high inflation. The object of this paper is to provide a (theoretical) explanation for this puzzling phenomenon based on the hypothesis that economic agents are ambiguity averse. The present paper considers a competitive general equilibrium model of goods, money and bond markets populated by agents with Choquet expected utility preferences, where both nominal and indexed bonds are available for trade and prices of all goods and bonds are determined endogenously. We obtain conditions which promote an endogenous cessation of trade in indexed bonds: i.e., conditions under which there is no trade in indexed bonds in any equilibrium; only nominal bonds are traded.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 9928.
Length: 26 pages
Date of creation: 2000
Date of revision:
CONTRACTS ; DEBT ; INDEXATION;
Other versions of this item:
- Sujoy Mukerji & Jean-Marc Tallon, 2004. "Ambiguity aversion and the absence of indexed debt," Economic Theory, Springer, vol. 24(3), pages 665-685, October.
- Sujoy Mukerji & Jean-Marc Tallon, 2000. "Ambiguity Aversion and the Absence of Indexed Debt," Economics Series Working Papers 28, University of Oxford, Department of Economics.
- Mokerji, S. & Tallon, J.M., 2000. "Ambiguity Aversion and the Absence of Indexed Debt," Papiers d'Economie MathÃÂ©matique et Applications 2000.53, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1).
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
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- Martin Cincibuch & Matrina Horníková, 2008.
"Measuring the Financial Markets’ Perception of EMU Enlargement: The Role of Ambiguity Aversion,"
Czech Journal of Economics and Finance (Finance a uver),
Charles University Prague, Faculty of Social Sciences, vol. 58(05-06), pages 210-230, August.
- Martin Cincibuch & Martina Hornikova, 2007. "Measuring the Financial Markets' Perception of EMU Enlargement: The Role of Ambiguity Aversion," Working Papers 2007/13, Czech National Bank, Research Department.
- repec:hal:journl:halshs-00174562 is not listed on IDEAS
- Shin-ichi Fukuda, 2012. "Infrequent Changes of the Policy Target: Robust Optimal Monetary Policy under Ambiguity," CARF F-Series CARF-F-295, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
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- Martin Schneider, 2010. "The Research Agenda: Martin Schneider on Multiple Priors Preferences and Financial Markets," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 11(2), April.
- Mukerji, Sujoy & Tallon, Jean-Marc, 2003. "Ellsberg's two-color experiment, portfolio inertia and ambiguity," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 299-316, June.
- Verónica Balzarotti, 2006.
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- Verónica Balzarotti, 2007. "Real Interest Rate Risk in the Argentine Banking System. A Measuring Model," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(46), pages 7-61, January -.
- Sujoy Mukerji & Jean-Marc Tallon, 2003. "An overview of economic applications of David Schmeidler`s models of decision making under uncertainty," Economics Series Working Papers 165, University of Oxford, Department of Economics.
- Larry G. Epstein & Martin Schneider, 2010.
"Ambiguity and Asset Markets,"
Annual Review of Financial Economics,
Annual Reviews, vol. 2(1), pages 315-346, December.
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