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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
343.
Find related papers by JEL classification: G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages G0 - Financial Economics - - General
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Fernando Alvarez & Robert E. Lucas, Jr. & Warren E. Weber, 2001.
"Interest rates and inflation,"
Working Papers
609, Federal Reserve Bank of Minneapolis.
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Other versions:
Fernando Alvarez & Robert E. Lucas Jr. & Warren E. Weber, 2001.
"Interest Rates and Inflation,"
American Economic Review,
American Economic Association, vol. 91(2), pages 219-225, May.
[Downloadable!] (restricted)