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Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing

Author

Listed:
  • David Eagle

    (Eastern Washington University)

  • Dale Domian

    (York University)

Abstract

In 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.

Suggested Citation

  • David Eagle & Dale Domian, 2005. "Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing," Finance 0509017, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0509017
    Note: Type of Document - pdf; pages: 35
    as

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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0509/0509017.pdf
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    References listed on IDEAS

    as
    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    2. Adolph, Brigitte & Wolfstetter, Elmar, 1991. "Wage-Indexation, Informational Externalities, and Monetary Policy," Oxford Economic Papers, Oxford University Press, vol. 43(3), pages 368-390, July.
    3. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Guest Blog: The Two Fundamental Welfare Principles of Monetary Economics (By David Eagle)
      by Lars Christensen in The Market Monetarist on 2012-01-21 03:51:45

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    Cited by:

    1. David Eagle & Dale Domian, 2003. "Sounding the Alarm on Inflation Indexing and Strict Inflation Targeting," Macroeconomics 0312010, University Library of Munich, Germany.
    2. David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance 0501009, University Library of Munich, Germany.
    3. David Eagle, 2005. "The Inflation Dynamics of Pegging Interest Rates," Macroeconomics 0502029, University Library of Munich, Germany.
    4. Koyama, Mark & Johnson, Blake, 2015. "Monetary stability and the rule of law," Journal of Financial Stability, Elsevier, vol. 17(C), pages 46-58.
    5. Eagle, David M. & Christensen, Lars, 2012. "Two Equations on the Pareto-Efficient Sharing of Real GDP Risk," MPRA Paper 41051, University Library of Munich, Germany.
    6. Evan F. Koenig, 2013. "Like a Good Neighbor: Monetary Policy, Financial Stability, and the Distribution of Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 57-82, June.

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    More about this item

    Keywords

    inflation indexing; quasi-real indexing;

    JEL classification:

    • G - Financial Economics

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