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The Market for Indexed Financial Instruments

Author

Listed:
  • Eva Marikova Leeds

    (Franklin & Marshall College)

Abstract

The lack of indexed financial instruments has long puzzled economists because their benefits seem obvious. Using a two-period model with random inflation, the author shows that borrowers and lenders prefer indexed instruments when their incomes are adjusted for inflation. Without adjustment, however, borrowers prefer nominal instruments. When adjustment is uncertain, real interest rates on indexed instruments resemble expected real interest rates on nominal instruments and neither instrument dominates. Given the cost of financial innovation, it is not surprising that indexed instruments have not arisen.

Suggested Citation

  • Eva Marikova Leeds, 1991. "The Market for Indexed Financial Instruments," Eastern Economic Journal, Eastern Economic Association, vol. 17(3), pages 291-296, Jul-Sep.
    • Handle: RePEc:eej:eeconj:v:17:y:1991:i:3:p:291-296
    as

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    File URL: http://web.holycross.edu/RePEc/eej/Archive/Volume17/V17N3P291_296.pdf
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    References listed on IDEAS

    as
    1. LeRoy, Stephen F, 1984. "Nominal Prices and Interest Rates in General Equilibrium: Money Shocks," The Journal of Business, University of Chicago Press, vol. 57(2), pages 177-195, April.
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    3. Stanley Fischer, 1979. "Corporate Supply of Index Bonds," NBER Working Papers 0331, National Bureau of Economic Research, Inc.
    4. Stuart E. Weiner, 1983. "Why are so few financial assets indexed to inflation?," Economic Review, Federal Reserve Bank of Kansas City, vol. 68(May), pages 3-18.
    5. James A. Wilcox., 1985. "Short-Term Movements of Long-Term Interest Rates: Evidence from the U.K. Indexed Market," Research Program in Finance Working Papers 145, University of California at Berkeley.
    6. James A. Wilcox, 1985. "Short-Term Movements of Long-Term Real Interest Rates: Evidence from the U.K. Indexed Bond Market," NBER Working Papers 1543, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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