| Indexed Unit Of Account |
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| CATEGORIES ABOUT INDEXED UNIT OF ACCOUNT | |
| macroeconomics | |
| money | |
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Indexed Units of Accounts help reduce Information Cost particularly during times of inflation uncertainty. " Indexing " allows the indexed unit to stand for stable purchasing power in some sense. Usually the indexing is with respect to the official Consumer Price Index, but in principle it can be with respect to any other well defined and officially published price indices. According to Robert Shiller, Chile's ''unidad de fomento''(UF) created in 1967 is the world's first indexed unit of account. As expected, it was born in an environment of high inflation. Indexed units of accounts take away much of the cost of inflation uncertainty, which could result in heavy costs on lenders or anyone who has cash receivable due to be repaid some time in the future, because the repayment may be in currency that has depreciated much in value. Worried about such eventuality, lenders typically would require an inflation risk premium to reflect the possibility of unexpectedly high inflation. Such precautionary action on the part of lenders, however, shifts the cost to borrowers who are then faced with much higher interest rates than otherwise. In Chile, the peso value of the UF is published daily through official channels. Although the usefulness of indexed units of accounts is much reduced in a world where Inflation Targeting is pursued vigorously by Central Banks , they remain potentially useful for longer term contracts or transactions involving payment in some distant future. Ho(2000) represents an application of the indexed unit of account concept in international finance. References: |
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