Index-linking of financial contracts : a survey of the state of the arts
BHATIA, K.
The theory and practice of index-linking of financial contracts is discussed. Attention focuses on the efficacy of index-linking in preserving the efficiency of the markets for finance and capital in an inflationary context. Both theory and evidence provide support for the view that generalized indexing of financial contracts promotes the volume of financial saving in an economy and, by offsetting the risk of uncertain changes in the price level, permits a longer maturity structure of financial saving and investment than would otherwise be possible. The literature is equivocal on the effects of index-linking on aggregate saving, efficiency of investment allocation, operation of financial intermediaries, and inflationary expectation. These issues require empirical resolution through studies of countries which have experimented widely with index-linking, such as Brazil and Finland. An appendix giving linkages used in various countries is included. Numerous references.
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