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The Ideal Inflation Indexed Bond and Irving Fisher's Impatience Theory of Interest in an Overlapping Generations World

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Author Info
John Geanakoplos () (Yale University, Cowles Foundation)
Abstract

Irving Fisher long advocated inflation indexed bonds. I prove in the context of a multicommodity CAPM world that the best welfare improving bond pays the minimum money needed to achieve the same utility, and not the minimum needed to buy an ideal commodity bundle. Irving Fisher also developed and advocated the impatience theory of interest. But in OLG economies, the rate of interest is determined by population growth, not impatience. I reconcile this contradiction by proving that in stationary OLG economies with land, the interest rate at the unique steady state does depend on impatience. Indeed, the proposition that greater impatience creates higher interest rates holds more generally in OLG with land than in Fisher's two-period model.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm406.

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Date of creation: 28 Jul 2004
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Handle: RePEc:ysm:somwrk:ysm406

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Related research
Keywords: Impatience; Theory of interest; Inflation indexed bond; Konus index; Capital asset pricing; Efficiency; Overlapping generations; Land;

Find related papers by JEL classification:
B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Quantitative and Mathematical
B31 - Schools of Economic Thought and Methodology - - History of Thought: Individuals - - - Individuals
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics

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