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Some Economic Implications of the Indexing of Financial Assets with Special Reference to Mortgages

In: The ‘New Inflation’ and Monetary Policy

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  • Franco Modigliani

Abstract

As long as loan contracts are expressed in conventional nominal terms, a high and variable rate of inflation — or more precisely a significant degree of uncertainty about the future of the price level — can play havoc with financial markets and interfere seriously with the efficient allocation of the flow of saving and the stock of capital. Indeed it may be argued that this is one of the most damaging unfavourable implications of unpredictable inflation rates, potentially as serious as the capricious redistribution of income and wealth which, in the popular view, is the hallmark of a disorderly inflationary process. It has been suggested by many economists for quite some time now that these unfavourable effects on resource allocation as well as the redistributive effects can be eliminated or at least greatly alleviated by the device of ‘indexing’ financial contracts, especially long-term contracts. Indexation consists in denominating the principal and the interest in ‘real terms’, i.e. in terms of ‘a suitable commodity basket’. In practice, this means that the nominal value of the principal is revalued periodically on the basis of an index of the changing nominal value of the stated basket, and that the agreed interest is to be applied to the revalued principal.

Suggested Citation

  • Franco Modigliani, 1976. "Some Economic Implications of the Indexing of Financial Assets with Special Reference to Mortgages," Palgrave Macmillan Books, in: Mario Monti (ed.), The ‘New Inflation’ and Monetary Policy, chapter 3, pages 90-141, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-02738-5_3
    DOI: 10.1007/978-1-349-02738-5_3
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    Cited by:

    1. Andrew Coleman, 2017. "Housing, the ‘Great Income Tax Experiment’, and the intergenerational consequences of the lease," Working Papers 17_09, Motu Economic and Public Policy Research.
    2. Ebrahim, M. Shahid & Shackleton, Mark B. & Wojakowski, Rafal M., 2011. "Participating mortgages and the efficiency of financial intermediation," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3042-3054, November.
    3. Andrew Coleman, 2007. "Credit constraints and housing markets in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2007/11, Reserve Bank of New Zealand.
    4. Berlinger, Edina, 2002. "A jövedelemarányos törlesztésű diákhitel egyszerű modellje [A simple model of student credit with repayments proportionate to income]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1042-1062.
    5. Shiller, Robert J. & Wojakowski, Rafał M. & Ebrahim, M. Shahid & Shackleton, Mark B., 2013. "Mitigating financial fragility with Continuous Workout Mortgages," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 269-285.
    6. Shiller, Robert J. & Wojakowski, Rafal M. & Ebrahim, M. Shahid & Shackleton, Mark B., 2019. "Continuous Workout Mortgages: Efficient pricing and systemic implications," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 244-274.
    7. Edina Berlinger & György Walter, 2016. "Income Contingent Repayments How Can We Get into a Debt Trap?," Central European Business Review, Prague University of Economics and Business, vol. 2016(2), pages 37-46.
    8. Murizah Osman Salleh & Aziz Jaafar & M. Shahid Ebrahim, 2011. "The Inhibition of Usury (Riba An-Nasi'ah) and the Economic Underdevelopment of the Muslim World," Working Papers 11002, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    9. Wojakowski, Rafal M. & Ebrahim, M. Shahid & Shackleton, Mark B., 2016. "Reducing the impact of real estate foreclosures with Amortizing Participation Mortgages," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 62-74.
    10. Robert J. Shiller & Rafal M. Wojakowski & M. Shahid Ebrahim & Mark B. Shackleton, 2017. "Continuous Workout Mortgages: Efficient Pricing and Systemic Implications," Cowles Foundation Discussion Papers 3016, Cowles Foundation for Research in Economics, Yale University.
    11. Marcin Kolasa, 2022. "Equilibrium foreign currency mortgages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 168-186, July.
    12. Andrew Coleman, 2017. "Housing, the ‘Great Income Tax Experiment’, and the intergenerational consequences of the lease," Working Papers 1709, University of Otago, Department of Economics, revised Apr 2017.
    13. Luci Ellis, 2006. "Housing and Housing Finance: The View from Australia and Beyond," RBA Research Discussion Papers rdp2006-12, Reserve Bank of Australia.
    14. Andrew Coleman, 2008. "Tax, Credit Constraints, and the Big Costs of Small Inflation," Working Papers 08_14, Motu Economic and Public Policy Research.
    15. Karamon, Kadiri & McManus, Douglas & Yannopoulos, Elias, 2016. "Spillover effects of continuous forbearance mortgages," Journal of Economics and Business, Elsevier, vol. 84(C), pages 95-108.

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