Aspects of the Theory of Indexed Bonds

The recent worldwide inflation precipitated an intensive discussion on ways and means that will reduce the social cost of the inflationary process. One of the main proposals put forward by many economists is the use of indexation or escalator agreements to make it easier to live with inflation.1 In particular, economists often recommend the use of index-linked bonds by government or private institutions as an appropriate tool to mitigate the cost of inflation.2 The idea has been expressed that linked bonds could be introduced in the private capital market to the mutual benefits of lenders and borrowers in handling more efficiently inflation risks.