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.
| Original language | English |
|---|---|
| Pages (from-to) | 721-745 |
| Number of pages | 25 |
| Journal | Journal of Money, Credit and Banking |
| Volume | 52 |
| Issue number | 4 |
| DOIs | |
| Publication status | Published - 2020 Jun 1 |
| Externally published | Yes |
Bibliographical note
Publisher Copyright:© 2019 The Ohio State University
Keywords
- D52
- E44
- financial innovation
- G12
- inflation-indexed bond
- nominal interest rate
- precautionary motive
- transaction cost
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics