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The Ideal Inflation‐Indexed Bond and Irving Fisher's Impatience Theory of Interest with Overlapping Generations

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  • John Geanakoplos

Abstract

Irving Fisher long advocated inflation‐indexed bonds. But with what index? I prove in the context of a multicommodity CAPM world that the best welfare‐improving bond pays the minimum money needed to achieve the same utility, and not the minimum needed to buy an ideal commodity bundle. Irving Fisher also developed and advocated the impatience theory of interest. But in OLG economies, the rate of interest is determined by population growth, not impatience. I reconcile this contradiction by proving that in stationary OLG economies with land, the interest rate at the unique steady state does depend on impatience. Indeed, the proposition that greater impatience creates higher interest rates holds more generally in OLG with land than in Fisher's two‐period model, because then income effects and substitution effects naturally work in the same direction.

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  • John Geanakoplos, 2005. "The Ideal Inflation‐Indexed Bond and Irving Fisher's Impatience Theory of Interest with Overlapping Generations," American Journal of Economics and Sociology, Wiley Blackwell, vol. 64(1), pages 257-306, January.
    • Handle: RePEc:bla:ajecsc:v:64:y:2005:i:1:p:257-306
    DOI: 10.1111/j.1536-7150.2005.00363.x
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    References listed on IDEAS

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    7. Fisher, Irving, 1907. "The Rate of Interest," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number fisher1907.
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    Cited by:

    1. Ricardo Reis & Mark W. Watson, 2007. "Measuring Changes in the Value of the Numeraire," Working Papers 2007-7, Princeton University. Economics Department..
    2. Minwook KANG, 2014. "Sunspots and Inflation-indexed Bonds," Economic Growth Centre Working Paper Series 1401, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.

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