Inflation, Index-Linked Bonds, and Asset Allocation

23 Pages Posted: 28 May 2004 Last revised: 19 Feb 2022

Date Written: December 1988

Abstract

The recent introduction of CPI-linked bonds by several financial institutions is a milestone in the history of the U.S. financial system. It has potentially far-reaching effects on individual and institutional asset allocation decisions because these securities represent the only true long-run hedge against inflation risk. CPI-linked bonds make possible the creation of additional financial innovations that would use them as the asset base. One such innovation that seems likely is inflation-protected retirement annuities. The introduction of index-linked bonds eliminates one of the main obstacles to the indexation of benefits in private pension plans. A firm could hedge the risk associated with a long-term indexed liability by investing in index-linked bonds with the same duration as the indexed liabilities.

Suggested Citation

Bodie, Zvi, Inflation, Index-Linked Bonds, and Asset Allocation (December 1988). NBER Working Paper No. w2793, Available at SSRN: https://ssrn.com/abstract=226853

Zvi Bodie (Contact Author)

Boston University ( email )

12 Salisbury Road
Brookline, MA
United States
617 306 5556 (Phone)

HOME PAGE: http://www.zvibodie.com

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