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Which improves welfare more: A nominal or an indexed bond?

  • Michael Magill

    (Department of Economics, University of Southern California, Los Angeles, CA 90089-0253, USA)

  • Martine Quinzii

    (Department of Economics, University of California, Davis, CA 95616-8578, USA)

Economists have long argued that loan contracts should be indexed to remove the risks arising from fluctuations in the purchasing power of money: indexation however while eliminating one risk, substitutes another, arising from fluctuations in relative prices of goods. We present a theoretical framework which permits the relative merits of a nominal versus an indexed bond to be assessed in a general equilibrium setting.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 10 (1997)
Issue (Month): 1 ()
Pages: 1-37

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Handle: RePEc:spr:joecth:v:10:y:1997:i:1:p:1-37
Note: Received: July 31, 1995; revised version August 7, 1996
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