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

David Eagle and Dale Domian

Applied Economics Letters, 1995, vol. 2, issue 12, 487-490

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.

Date: 1995
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DOI: 10.1080/135048595356943

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