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Inflation-Proof Credits and Financial Instruments. Making the Fisher Hypothesis a Reality

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  • Orus, Juan
  • González, Manuel

Abstract

The financial crises of recent years have revealed the sensitivity and vulnerability of nominal interest rates to inflation, which reduces the value of money and affects the returns of financial instruments. The lack of resources to mitigate the impact of inflation has been a limiting factor that has had a marked effect on economies and on the development of mortgage markets in Latin America’s unstable economies. This study demonstrates an alternative financial method that compensates losses caused by inflation in nominal fixed-rate mortgages and ensures returns in real terms for banks and investors, while offering families the possibility that their payments may represent an increasingly smaller percentage of their income, even in high-inflation scenarios such as those seen in Latin America during the 1980s and 1990s. The new methodology herein proposed maintains in each period the parity of Fisher’s Law with inflation. That is, the real interest rate is kept fixed throughout the life of the mortgage and in any economic conditions that may arise.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 343.

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Date of creation: May 2004
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Handle: RePEc:pra:mprapa:343

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Keywords: Fisher's Law; Mortgage Models;

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  1. Ioannis Karatzas & Martin Shubik & William D. Sudderth & John Geanakoplos, 2003. "The Harmonic Fisher Equation and the Inflationary Bias of Real Uncertainty," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1424, Cowles Foundation for Research in Economics, Yale University.
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