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Indexed Debt Contracts And The Financial Accelerator

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Executive Summary

This paper addresses the positive and normative implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler, and Gilchrist (1999). The principal conclusions are that the optimal degree of indexation is significant, and that the business cycle properties of the model are altered under this level of indexation. The fundamental function of credit markets is to channel funds from savers to entrepreneurs who have some valuable capital investment project. These efforts are hindered by agency costs arising from asymmetric information.

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