"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

288 Miscellanea
the long-term real rate by the rate of inflation). In this case, the nominal payments
called for under the IPM as well as under the French Mortgage will rise at the
rate of inflation, i.e. will be constant in real terms.
To the extent that the Fisher Law fails to hold, real payments with an IPM are
not entirely constant while under the French Mortgage they will remain perfectly
constant but the maturity becomes uncertain. This serves to illustrate the tradeoff
implied for borrows and lenders in the choice between the alternative instruments.
However, the IPM has one additional valuable feature: by choosing a real
long rate above or below the expected real rate one can produce negative or positive
tilting of any desired extent, slowing or speeding amortization. This may be
a desirable feature for some borrowers or lenders.
We have reviewed the several instruments which are available to avoid the
severe problems which arise with the traditional mortgage in the presence of
significant inflation, and in particular the tilt problem. Given the variety of
instruments available, it seems truly amazing that a large number of countries,
including the U.S., has done nothing whatever to encourage the development of
tilt-proof instruments. It is particularly surprising, in that the cost of the inflationinduced
tilt must be rated as quite high when one includes the effect on the construction
industry and employment, the derived effects on aggregate demand and
output, and the effects on the welfare of those who have been forced to forego
or delay the acquisition of a house or to acquire facilities below the level that
would have been appropriate in the absence of inflation. At the same it is hard to
see that adoption of one or more of the above proposals, especially on an optional
basis, would have involved significant costs or dangers, other than adjusting to
novelty. I would like to conclude, therefore, with the suggestion that this whole
episode is a glaring illustration of the devastating effects of inflation, brought
about by inflation illusion and inertia, and with the hope that the future will both
see less need for the devices proposed here and more readiness to accept them.