The more interesting question is whether the inflation indexed bond or the adjustable Series EE bond is better. The Series EE bond being sold these days is indexed to something like 90% of the return on 5 year treasuries. Since "the market" for 5 year treasuries incorporates a guess about future inflation rates into its pricing, it is arguably the case that you are better off with a Series EE than with the inflation indexed equivalent. The reason is that the inflation indexed savings bond is indexed ex-post on inflation as measured by the CPI: changes in price levels are measured, and the bond values adjusted after that measurement is made. But investors adjust the prices of bond based on *their best guess* about what inflation will be plus *a margin designed to cover their own estimate of their own likely margin of error.* I would expect such an ex ante estimate to exceed, as a general rule, adjustments made ex post.
The interesting theoretical issue here is that the liqudity preference thus defined will cause higher interest rates and lower the marginal return to (physical) capital. It would pehaps make sense, since Sawicky is always collecting reforms, to require the commercial and government bond markets to issue *only* ex-post, annually inflation adjusted debt. That would decrease the inflation-anxiety component of the prices bid for bonds, especially to the extent that "the market" was confident that the inflation barometer did in fact measure "the real" inflation rate. Ceteris paribus, interest rates should be bit lower, investment a bit higher.
In fact, it would change things around. Corporate bond issuers would be faced with the prospect that a bond issued next year would have the contracted principal & interest due plus whatever adjustment was necessary ex-post. On the one hand, that could be inflationary, since firms might try to raise prices of goods to cover their *anticipated* ex post obligations. On the other hand, it might also induce them to kick harder for a lower interest rate, on the argument that they had to have a "protective margin" to cover anticipated increases in bond premiums due to the CPI adjustment.
Speculatively,
gn
-- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222
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