Working Paper: NBER ID: w2793
Authors: Zvi Bodie
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.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of inflation-indexed bonds (E31) | improved portfolio efficiency (G11) |
| availability of inflation-indexed bonds (E31) | development of inflation-protected retirement annuities (G52) |
| introduction of inflation-indexed bonds (E31) | improved real value of retirement benefits (H55) |