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Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing

David Eagle () and Dale Domian
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Dale Domian: York University

Finance from University Library of Munich, Germany

Abstract: In a pure-exchange economy with one good, stochastic aggregate demand and supply, and consumers having the same relative-risk aversion, Pareto efficiency requires each individual’s consumption to be proportional to aggregate supply. While neither nominal contracts nor pure inflation- indexed contracts provide this proportionality, quasi-real contracts do. Quasi-real contracts adjust for aggregate-demand-caused inflation but not for aggregate-supply-caused inflation, causing their real obligations to be proportional to aggregate supply. When consumers differ in their relative risk aversion, or experience stochastic utility or endowment shocks, they will need insurance and other risk-transfer contracts in addition to quasi-real contracts.

Keywords: inflation indexing; quasi-real indexing (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Date: 2005-09-12
Note: Type of Document - pdf; pages: 35
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