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Ambiguity Aversion and the Absence of Indexed Debt

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  • Mukerji, S.
  • Tallon, J.-M.

Abstract

Inspite of wide and long-standing support among economists for indexation of loan contracts there has been relatively little use of indexation, except in situations of extremely high inflation. The object of this paper is to provide a (theoretical) explanation for this puzzling phenomenon based on the hypothesis that economic agents are ambiguity averse. The present paper considers a competitive general equilibrium model of goods, money and bond markets populated by agents with Choquet expected utility preferences, where both nominal and indexed bonds are available for trade and prices of all goods and bonds are determined endogenously. We obtain conditions which promote an endogenous cessation of trade in indexed bonds: i.e., conditions under which there is no trade in indexed bonds in any equilibrium; only nominal bonds are traded.

Suggested Citation

  • Mukerji, S. & Tallon, J.-M., 2000. "Ambiguity Aversion and the Absence of Indexed Debt," Economics Series Working Papers 9928, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:9928
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Shin-ichi Fukuda, 2012. "Infrequent Changes of the Policy Target: Robust Optimal Monetary Policy under Ambiguity," CIRJE F-Series CIRJE-F-863, CIRJE, Faculty of Economics, University of Tokyo.
    2. Larry G. Epstein & Martin Schneider, 2010. "Ambiguity and Asset Markets," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 315-346, December.
    3. Mukerji, Sujoy & Tallon, Jean-Marc, 2003. "Ellsberg's two-color experiment, portfolio inertia and ambiguity," Journal of Mathematical Economics, Elsevier, pages 299-316.
    4. Verónica Balzarotti, 2007. "Real Interest Rate Risk in the Argentine Banking System. A Measuring Model," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, pages 7-61.
    5. Pasquale Scandizzo & Raghav Gaiha & Katsushi Imai, 2009. "Option Values, Switches, and Wages: An Analysis of the Employment Guarantee Scheme in India," Review of Development Economics, Wiley Blackwell, pages 248-263.
    6. Sujoy Mukerji & Jean-Marc Tallon, 2003. "An overview of economic applications of David Schmeidler`s models of decision making under uncertainty," Economics Series Working Papers 165, University of Oxford, Department of Economics.
    7. Martin Schneider, 2010. "The Research Agenda: Martin Schneider on Multiple Priors Preferences and Financial Markets," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 11(2), April.
    8. Mukerji, Sujoy & Tallon, Jean-Marc, 2004. "Ambiguity aversion and the absence of wage indexation," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 653-670, April.
    9. Martin Cincibuch & Matrina Horníková, 2008. "Measuring the Financial Markets’ Perception of EMU Enlargement: The Role of Ambiguity Aversion," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(05-06), pages 210-230, August.
    10. Eisei Ohtaki & Hiroyuki Ozaki, 2015. "Monetary equilibria and Knightian uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 435-459.
    11. Verónica Balzarotti, 2007. "Real Interest Rate Risk in the Argentine Banking System. A Measuring Model," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, pages 7-61.
    12. Eisei Ohtaki & Hiroyuki Ozaki, "undated". "Optimality in a Stochastic OLG Model with Ambiguity," Working Papers e69, Tokyo Center for Economic Research.

    More about this item

    Keywords

    CONTRACTS ; DEBT ; INDEXATION;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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