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Inflation‐Indexed Bonds and Nominal Bonds: Financial Innovation and Precautionary Motives

Inflation‐Indexed Bonds and Nominal Bonds: Financial Innovation and Precautionary Motives

Authors :
Minwook Kang
School of Social Sciences
Source :
Journal of Money, Credit and Banking. 52:721-745
Publication Year :
2019
Publisher :
Wiley, 2019.

Abstract

This paper introduces a two-period monetary general equilibrium model with proportional transaction costs on nominal and inflation-indexed bonds. This paper demonstrates that financial innovation on indexed bonds causes equilibrium interest rates of the nominal bond to increase when agents have precautionary saving motives. This result implies that ignoring precautionary motives would underestimate savers' welfare gain and overestimate borrowers' welfare gain from innovation on indexed bonds.

Details

ISSN :
15384616 and 00222879
Volume :
52
Database :
OpenAIRE
Journal :
Journal of Money, Credit and Banking
Accession number :
edsair.doi.dedup.....5b423ac9b4f773c668d1dcdd7e7d58d3
Full Text :
https://doi.org/10.1111/jmcb.12609