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Benefits and limitations of inflation indexed Treasury bonds

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  • Pu Shen

Abstract

In recent years, members of Congress and academia have repeatedly urged the U.S. Treasury to issue some portion of its debt in the form of inflation indexed bonds. With an indexed bond, the interest and maturity value are adjusted by the rate of inflation over the life of the bond. Because the cash flow of an indexed bond is adjusted for inflation, the bond's real value does not vary with inflation, protecting investors and issuers alike from inflation risk.> Inflation indexed bonds would be a fundamental innovation in U.S. financial markets, providing benefits to investors, the Treasury, and policymakers. Despite the potential benefits, the U.S. Treasury has never issued indexed bonds. In fact, only a handful of industrialized countries, including the United Kingdom and Canada, have issued inflation indexed government bonds.> Shen discusses the benefits of inflation indexed Treasury bonds and points out some of their limitations. She concludes that, if carefully designed, inflation indexed Treasury bonds are likely to be beneficial.

Suggested Citation

  • Pu Shen, 1995. "Benefits and limitations of inflation indexed Treasury bonds," Economic Review, Federal Reserve Bank of Kansas City, vol. 80(Q III), pages 41-56.
    • Handle: RePEc:fip:fedker:y:1995:i:qiii:p:41-56:n:v.80no.3
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    References listed on IDEAS

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    1. Kane, Edward J, 1970. "Short-Changing the Small Saver: Federal Government Discrimination against the Small Saver During the Vietnam War," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(4), pages 513-522, November.
    2. Viard, Alan D, 1993. "The Welfare Gain from the Introduction of Indexed Bonds," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 612-628, August.
    3. Stuart E. Weiner, 1983. "Why are so few financial assets indexed to inflation?," Economic Review, Federal Reserve Bank of Kansas City, vol. 68(May), pages 3-18.
    4. M. Ellen Gaske, 1991. "Sources of fluctuations in long-term expected real rates of interest: evidence from the U.K. indexed bond market," Research Paper 9123, Federal Reserve Bank of New York.
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    Cited by:

    1. Noureddine Benlagha, 2013. "The Long-run Relationship among Index-linked Bonds and Conventional Bonds," Review of Economics & Finance, Better Advances Press, Canada, vol. 3, pages 15-24, February.
    2. Kanas, Angelos, 2014. "Bond futures, inflation-indexed bonds, and inflation risk premium," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 82-99.
    3. Li, Kai, 2019. "Portfolio selection with inflation-linked bonds and indexation lags," Journal of Economic Dynamics and Control, Elsevier, vol. 107(C), pages 1-1.
    4. Gregory D. Hess & Charles S. Morris, 1996. "The long-run costs of moderate inflation," Economic Review, Federal Reserve Bank of Kansas City, vol. 81(Q II), pages 71-88.
    5. Mark M. Spiegel, 1998. "Central bank independence and inflation expectations: evidence from British index-linked gilts," Economic Review, Federal Reserve Bank of San Francisco, pages 3-14.
    6. Monique Reid, 2009. "Isolating A Measure Of Inflation Expectations For The South African Financial Market Using Forward Interest Rates," South African Journal of Economics, Economic Society of South Africa, vol. 77(3), pages 399-413, September.
    7. Zee, H. H., 1997. "A note on the nonneutral taxation of indexed government bonds under alternative indexation schemes," Economics Letters, Elsevier, vol. 56(1), pages 71-75, September.
    8. Cartea, Álvaro & Saúl, Jonatan & Toro, Juan, 2012. "Optimal portfolio choice in real terms: Measuring the benefits of TIPS," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 721-740.
    9. Pu Shen, 1998. "How important is the inflation risk premium?," Economic Review, Federal Reserve Bank of Kansas City, vol. 83(Q IV), pages 35-47.
    10. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a central bank perspective," Occasional Papers 0705, Banco de España.

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