Indexed unit of account

When an indexed unit of account is used in contracts, payments are indexed to the price level in such a way that changes in the inflation rate have no effect on the real value of payments. Non-indexed units, such as contracts written in currency units, incur inflation risk. In periods of unexpectedly high inflation, the debtor is required to pay less in real terms than what both the debtor and creditor agreed to. On the other hand, in periods of unexpectedly low inflation, the debtor is required to pay more in real terms than the agreed value. Contracts in indexed units of account incur no inflation risk, as the real value of payments remains constant.

Indexation is typically achieved by adjusting payments using a consumer price index. An indexed unit of account, called the Unidad de Fomento was introduced in Chile in 1967, but it was only in the early 1980s that it was widely adopted by both the Chilean people and the Chilean government. By 1983, over 60 percent of total bank loans in Chile were written in the UF. [ cite journal | last = Herrera | first = Luis Óscar | coauthors = and Rodrigo O. Valdés | year = 2004 | month = May | title = Dedollarization, Indexation and Nominalization: The Chilean Experience | journal = Central Bank of Chile Working Papers | issue = 261 ] The value of the UF in pesos is published daily in all major Chilean newspapers and on government websites. Initial doubts about the Chilean governments ability to adopted inflation targeting under such an indexed financial system proved unfounded as the Bank of Chile has successfully maintained low inflation rates since 1998.

In 1848, John Stuart Mill discusses the inflation risk of non-indexed units of accounts. He states that "All variations in the value of the circulating medium are mischievous: they disturb existing contracts and expectations, and the liability to such changes renders every pecuniary engagement of long date entirely precarious." [ cite book | last = Mill | first = John Stuart | title = Principles of Political Economy | publisher = John W. Parker | location = West Strand | date = 1848 ] In 1887 William Stanley Jevons refers to previous authors and discusses an indexed unit of account which he calls a "tabular standard of value" [cite book | last = Jevons | first = William Stanley | title = Money and the Mechanism of Exchange | publisher = D. Appleton and Company | year = 1876 | chapter = Chapter XXV ] . In 1887 Alfred Marshall, also referring to previous authors, discusses a similar proposal. [ cite book | last = Marshall | first = Alfred | editor = Pigou | title = Memorials of Alfred Marshall | chapter = Remedies for Fluctuations of General Prices | location = London | publisher = MacMillan and Co. | year = 1925 ] In 2003 Robert Shiller similarly argues for the introduction of an indexed unit of account into the United States economy as a means of eliminating inflation risk. [cite book | last = Shiller | first = Robert | title = The New Financial Order | publisher = Princeton University Press | year = 2003 ]

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