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Inflation-Proof Credits and Financial Instruments. Making the Fisher Hypothesis a Reality

Author

Listed:
  • Orus, Juan
  • González, Manuel

Abstract

The financial crises of recent years have revealed the sensitivity and vulnerability of nominal interest rates to inflation, which reduces the value of money and affects the returns of financial instruments. The lack of resources to mitigate the impact of inflation has been a limiting factor that has had a marked effect on economies and on the development of mortgage markets in Latin America’s unstable economies. This study demonstrates an alternative financial method that compensates losses caused by inflation in nominal fixed-rate mortgages and ensures returns in real terms for banks and investors, while offering families the possibility that their payments may represent an increasingly smaller percentage of their income, even in high-inflation scenarios such as those seen in Latin America during the 1980s and 1990s. The new methodology herein proposed maintains in each period the parity of Fisher’s Law with inflation. That is, the real interest rate is kept fixed throughout the life of the mortgage and in any economic conditions that may arise.

Suggested Citation

  • Orus, Juan & González, Manuel, 2004. "Inflation-Proof Credits and Financial Instruments. Making the Fisher Hypothesis a Reality," MPRA Paper 343, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:343
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    File URL: https://mpra.ub.uni-muenchen.de/343/1/MPRA_paper_343.pdf
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    References listed on IDEAS

    as
    1. Ioannis Karatzas & Martin Shubik & William D. Sudderth & John Geanakoplos, 2003. "The Harmonic Fisher Equation and the Inflationary Bias of Real Uncertainty," Cowles Foundation Discussion Papers 1424, Cowles Foundation for Research in Economics, Yale University.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Fisher's Law; Mortgage Models;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G0 - Financial Economics - - General

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