In this paper we introduce a class of information-based models for the
pricing of fixed-income securities. We consider a set of continuous- time
information processes that describe the flow of information about market
factors in a monetary economy. The nominal pricing kernel is at any given time
assumed to be given by a function of the values of information processes at
that time. By use of a change-of-measure technique we derive explicit
expressions for the price processes of nominal discount bonds, and deduce the
associated dynamics of the short rate of interest and the market price of risk.
The interest rate positivity condition is expressed as a differential
inequality. We proceed to the modelling of the price-level, which at any given
time is also taken to be a function of the values of the information processes
at that time. A simple model for a stochastic monetary economy is introduced in
which the prices of nominal discount bonds and inflation-linked notes can be
expressed in terms of aggregate consumption and the liquidity benefit generated
by the money supply
