Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing
In a pure-exchange economy with one good, stochastic aggregate demand and supply, and consumers having the same relative-risk aversion, Pareto efficiency requires each individual’s consumption to be proportional to aggregate supply. While neither nominal contracts nor pure inflation- indexed contracts provide this proportionality, quasi-real contracts do. Quasi-real contracts adjust for aggregate-demand-caused inflation but not for aggregate-supply-caused inflation, causing their real obligations to be proportional to aggregate supply. When consumers differ in their relative risk aversion, or experience stochastic utility or endowment shocks, they will need insurance and other risk-transfer contracts in addition to quasi-real contracts.
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- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
- Adolph, Brigitte & Wolfstetter, Elmar, 1991. "Wage-Indexation, Informational Externalities, and Monetary Policy," Oxford Economic Papers, Oxford University Press, vol. 43(3), pages 368-390, July.
- Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
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