# Information, inflation, and interest

Lane P. Hughston; Andrea Macrina

Banach Center Publications (2008)

- Volume: 83, Issue: 1, page 117-138
- ISSN: 0137-6934

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topLane P. Hughston, and Andrea Macrina. "Information, inflation, and interest." Banach Center Publications 83.1 (2008): 117-138. <http://eudml.org/doc/282359>.

@article{LaneP2008,

abstract = {We propose a class of discrete-time stochastic models for the pricing of inflation-linked assets. The paper begins with an axiomatic scheme for asset pricing and interest rate theory in a discrete-time setting. The first axiom introduces a "risk-free" asset, and the second axiom determines the intertemporal pricing relations that hold for dividend-paying assets. The nominal and real pricing kernels, in terms of which the price index can be expressed, are then modelled by introducing a Sidrauski-type utility function depending on (a) the aggregate rate of consumption, and (b) the aggregate rate of real liquidity benefit conferred by the money supply. Consumption and money supply policies are chosen such that the expected joint utility obtained over a specified time horizon is maximised subject to a budget constraint that takes into account the "value" of the liquidity benefit associated with the money supply. For any choice of the bivariate utility function, the resulting model determines a relation between the rate of consumption, the price level, and the money supply. The model also produces explicit expressions for the real and nominal pricing kernels, and hence establishes a basis for the valuation of inflation-linked securities.},

author = {Lane P. Hughston, Andrea Macrina},

journal = {Banach Center Publications},

keywords = {inflation; interest rate models; partial information; price level; money supply; consumption; liquidity; utility; transversality condition},

language = {eng},

number = {1},

pages = {117-138},

title = {Information, inflation, and interest},

url = {http://eudml.org/doc/282359},

volume = {83},

year = {2008},

}

TY - JOUR

AU - Lane P. Hughston

AU - Andrea Macrina

TI - Information, inflation, and interest

JO - Banach Center Publications

PY - 2008

VL - 83

IS - 1

SP - 117

EP - 138

AB - We propose a class of discrete-time stochastic models for the pricing of inflation-linked assets. The paper begins with an axiomatic scheme for asset pricing and interest rate theory in a discrete-time setting. The first axiom introduces a "risk-free" asset, and the second axiom determines the intertemporal pricing relations that hold for dividend-paying assets. The nominal and real pricing kernels, in terms of which the price index can be expressed, are then modelled by introducing a Sidrauski-type utility function depending on (a) the aggregate rate of consumption, and (b) the aggregate rate of real liquidity benefit conferred by the money supply. Consumption and money supply policies are chosen such that the expected joint utility obtained over a specified time horizon is maximised subject to a budget constraint that takes into account the "value" of the liquidity benefit associated with the money supply. For any choice of the bivariate utility function, the resulting model determines a relation between the rate of consumption, the price level, and the money supply. The model also produces explicit expressions for the real and nominal pricing kernels, and hence establishes a basis for the valuation of inflation-linked securities.

LA - eng

KW - inflation; interest rate models; partial information; price level; money supply; consumption; liquidity; utility; transversality condition

UR - http://eudml.org/doc/282359

ER -

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