ABSTRACT

This chapter explains the absence of indexed securities in Australia. It examines the reasons for the non-existence of indexed securities in the Australian financial system. It then includes some empirical results on the formation of interest rate expectations. The chapter also takes up the question of whether the government should have taken the lead in issuing indexed securities. An important problem in setting up an indexed loan is choosing the price index to which the nominal interest payments are to be tied. The major impact of inflation on financial transactions is that, unless some compensation is provided for it, it leads to a redistribution of wealth from lenders to borrowers. Some lenders might favour an indexed loan that would yield them a certain real return and make it unnecessary for them to bear the price-level risk involved in a nominal bond that pays a return determined by the Fischer relationship.