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

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

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David Eagle (Eastern Washington University)
Dale Domian (York University)

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David Eagle

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.

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Paper provided by EconWPA in its series Finance with number 0509017.

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Length: 35 pages
Date of creation: 12 Sep 2005
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Handle: RePEc:wpa:wuwpfi:0509017

Note: Type of Document - pdf; pages: 35
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G - Financial Economics

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-09-29 (All new papers)

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.:

Adolph, Brigitte & Wolfstetter, Elmar, 1991. "Wage-Indexation, Informational Externalities, and Monetary Policy," Oxford Economic Papers, Oxford University Press, vol. 43(3), pages 368-90, July. [Downloadable!] (restricted)
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 637-54, May-June. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)

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Cited by:
(explanations, 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.)

David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance 0501009, EconWPA. [Downloadable!]
David Eagle, 2005. "The Inflation Dynamics of Pegging Interest Rates," Macroeconomics 0502029, EconWPA. [Downloadable!]

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