Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing
AbstractIn a pure-exchange economy with one good, stochastic aggregate demand and supply, and consumers having the same relative-risk aversion, Pareto efficiency requires each individual’s consumption to be proportional to aggregate supply. While neither nominal contracts nor pure inflation- indexed contracts provide this proportionality, quasi-real contracts do. Quasi-real contracts adjust for aggregate-demand-caused inflation but not for aggregate-supply-caused inflation, causing their real obligations to be proportional to aggregate supply. When consumers differ in their relative risk aversion, or experience stochastic utility or endowment shocks, they will need insurance and other risk-transfer contracts in addition to quasi-real contracts.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0509017.
Length: 35 pages
Date of creation: 12 Sep 2005
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inflation indexing; quasi-real indexing;
Find related papers by JEL classification:
- G - Financial Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-09-29 (All new papers)
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- Guest Blog: The Two Fundamental Welfare Principles of Monetary Economics (By David Eagle)
by Lars Christensen in The Market Monetarist on 2012-01-20 21:51:45
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