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The Welfare Gain from the Introduction of Indexed Bonds

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  • Viard, Alan D

Abstract

I examine the welfare gain from the introduction of indexed bonds in zero net supply. I show that trade in indexed bonds enables investors to reallocate existing economic risks in a mutually beneficial manner. The aggregate gain from the introduction of a safe asset is proportional to the variance of the minimum-variance portfolio formed from the risky assets and to the heterogeneity of investors' risk preferences. In an economy with nominal but not indexed bonds, the welfare loss from inflation uncertainty is lowest when inflation is most closely correlated with real returns on other assets. Contrary to popular intuition, the introduction of indexed bonds may reduce saving. Copyright 1993 by Ohio State University Press.

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  • Viard, Alan D, 1993. "The Welfare Gain from the Introduction of Indexed Bonds," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 612-628, August.
    • Handle: RePEc:mcb:jmoncb:v:25:y:1993:i:3:p:612-28
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    Cited by:

    1. Michael Magill & Martine Quinzii, 1997. "Which improves welfare more: A nominal or an indexed bond?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(1), pages 1-37.
    2. LuisM. Viceira & John Y. Campbell, 2001. "Who Should Buy Long-Term Bonds?," American Economic Review, American Economic Association, vol. 91(1), pages 99-127, March.
    3. David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance 0501009, University Library of Munich, Germany.
    4. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, 2001. "The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 321-370, National Bureau of Economic Research, Inc.
    5. Pu Shen, 1995. "Benefits and limitations of inflation indexed Treasury bonds," Economic Review, Federal Reserve Bank of Kansas City, vol. 80(Q III), pages 41-56.
    6. Peters, David W., 2007. "The behavior of government of Canada real return bond returns," International Review of Financial Analysis, Elsevier, vol. 16(2), pages 152-171.
    7. Philipp Karl Illeditsch, 2018. "Residual Inflation Risk," Management Science, INFORMS, vol. 64(11), pages 5289-5314, November.
    8. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a central bank perspective," Occasional Papers 0705, Banco de España.
    9. Minwook Kang, 2020. "Inflation‐Indexed Bonds and Nominal Bonds: Financial Innovation and Precautionary Motives," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 721-745, June.

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