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Quasi-real bonds: inflation-indexing that retains the government's hedge against aggregate-supply shocks

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  • David Eagle
  • Dale Domian

Abstract

Inflation-indexed bonds, such as the UK's indexed-linked gilts and Canada's real return bonds, are hailed by economists for reducing inflation risk to both borrowers and lenders. However, we find that fixed-rate bonds have an advantage over inflation-indexed bonds by providing borrowers with a hedge against aggregate-supply shocks. National governments would benefit from this in the event of a major catastrophe that substantially reduces aggregate supply. To retain this hedge and still provide indexing for aggregate-demand-caused inflation, we propose a financial innovation called quasi-real bonds which are indexed to nominal GDP growth.

Suggested Citation

  • David Eagle & Dale Domian, 1995. "Quasi-real bonds: inflation-indexing that retains the government's hedge against aggregate-supply shocks," Applied Economics Letters, Taylor & Francis Journals, vol. 2(12), pages 487-490.
    • Handle: RePEc:taf:apeclt:v:2:y:1995:i:12:p:487-490
    DOI: 10.1080/135048595356943
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