Inflation, credit, and indexed unit of account

•The nature of an indexed unit of account is investigated using a standard monetary model.•An indexed unit of account turns out to resolve credit-trade friction attributed to inflation.•Also, it removes the redistribution effect between debtors and creditors caused by unexpected inflation.•If inflation is low enough, money is used as a unit of account for even deferred-payment trades.•If inflation is high, an indexed unit of account emerges as a unit of account for deferred-payment trades.

A simple monetary model is constructed to study the implications of an indexed unit of account (Indexed-UoA). In an economy with an Indexed-UoA, the credit-trade friction attributed to inflation can be resolved and unexpected inflation causes no redistribution effect between debtors and creditors. However, in an economy without an Indexed-UoA, credit trades occur only if inflation is not too high and unexpected inflation renders debtors better off, but creditors worse off. In a high-inflation economy, money is used as a unit of account for spot trades only and an Indexed-UoA emerges as a unit of account for deferred-payment trades.