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WHY DO WE OBSERVE SO LITTLE INDEXATION? AN ANSWER FROM THE THEORY OF INSURANCE

Guido Tabellini
Giornale degli Economisti e Annali di Economia
Nuova Serie, Anno 43, No. 5/6 (Maggio-Giugno 1984), pp. 417-431
Published by: EGEA SpA
Stable URL: http://www.jstor.org/stable/23246080
Page Count: 15
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
WHY DO WE OBSERVE SO LITTLE INDEXATION? AN ANSWER FROM THE THEORY OF INSURANCE
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Abstract

In this paper indexation is considered as an insurance contract against the risk of unanticipated inflation. Expressions for the supply of and demand for indexation are derived. The desired degree of indexation of any item in a portfolio turns out to depend, among other things, on the degree of indexation on other items, on the covariances between inflation and nominal returns on all items in the portfolio, on expected inflation, and on the marginal risk premium for the inflation risk. These results are compared with those reached by the macroeconomic literature on indexation. The consequences of exogenous changes in the supply of indexed assets are analysed.

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