Concerns should include the homeowner's strategic selling of the house or cancellation of the policy, moral hazard risk, and risk of poor maintenance of the house. Still, it may be possible to design new institutions that reduce real estate owners' risk substantially. Indexation Some of the risks to the components of wealth are attributable to inflation-induced shifts in the real values of nominal payments that are specified in contracts. Of course, nominal assets are important for many individuals, especially for the elderly. Although inflation might appear to be vanquished at the moment, we can never be sure that it will stay down in future years, so the risk of inflation remains.
Indexed debt protects people against the risk of inflation by tying debt payments to inflation.
TIPS represents a significant financial innovation, but even though public acceptance has been described as encouraging relative to expectations, the public actually has purchased very little of these new securities, amounting to roughly 0.5 percent of the U.S. federal debt. Other countries' experiences indicate that the public is often only marginally interested in purchasing indexed debt, even in times of high inflation. They include lack of appreciation of inflation uncertainty, lack of understanding of the nature of redistributions caused by unexpected inflation, and simple difficulties in understanding the math involved in indexation formulas. To promote the use of this unit in setting prices and defining payments, the government could publish regularly an exchange rate between the unit and the currency and initiate its use by denominating indexed debt, tax brackets, and the like in these units. If people then chose to quote prices and payments in terms of the units rather than the currency, they automatically would be indexing them to inflation.