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The case for TIPS: an examination of the costs and benefits

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  • William C. Dudley
  • Jennifer Roush
  • Michelle Steinberg Ezer
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    Abstract

    Slightly more than a decade has passed since the introduction of the Treasury Inflation-Protected Securities (TIPS) program, through which the U.S. Treasury Department issues inflation-indexed debt. Several studies have suggested that the program has been a financial disappointment for the Treasury and by extension U.S. taxpayers. Relying on ex post analysis, the studies argue that a more cost-effective strategy remains the issuance of nominal Treasury securities. This article proposes that evaluations of the TIPS program be more comprehensive, and instead focus on the ex ante costs of TIPS issuance compared with nominal Treasury issuance. The authors contend that ex ante analysis is a more effective way to assess the costs of TIPS over the long run. Furthermore, relative cost calculations--whether ex post or ex ante--are just one aspect of a comprehensive analysis of the costs and benefits of the TIPS program. TIPS issuance provides other benefits that should be taken into account when evaluating the program, especially when TIPS are only marginally more expensive or about as expensive to issue as nominal Treasury securities.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

    Volume (Year): (2009)
    Issue (Month): Jul ()
    Pages: 1-17

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    Handle: RePEc:fip:fednep:y:2009:i:jul:p:1-17:n:v.15no.1

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    Related research

    Keywords: Treasury bonds ; Debt;

    References

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    1. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 155-208 National Bureau of Economic Research, Inc.
    2. Ang, Andrew & Bekaert, Geert, 2004. "The Term Structure of Real Rates and Expected Inflation," CEPR Discussion Papers 4518, C.E.P.R. Discussion Papers.
    3. Stefania D'Amico & Don H. Kim & Min Wei, 2008. "Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices," Finance and Economics Discussion Series 2008-30, Board of Governors of the Federal Reserve System (U.S.).
    4. Thomas Laubach, 2003. "New evidence on the interest rate effects of budget deficits and debt," Finance and Economics Discussion Series 2003-12, Board of Governors of the Federal Reserve System (U.S.).
    5. Michael J. Fleming & Bruce Mizrach, 2009. "The microstructure of a U.S. Treasury ECN: the BrokerTec platform," Staff Reports 381, Federal Reserve Bank of New York.
    6. Michael J. Fleming & Neel Krishnan, 2012. "The microstructure of the TIPS market," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 27-45.
    7. Michael J. Fleming, 2002. "Are larger Treasury issues more liquid? Evidence from bill reopenings," Proceedings, Federal Reserve Bank of Cleveland, pages 707-739.
    8. Frederic S. Mishkin, 2007. "Inflation Dynamics," NBER Working Papers 13147, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Guido Sandleris & Mark J.L Wright, 2013. "GDP-Indexed Bonds: A Tool to Reduce Macroeconomic Risk?," Business School Working Papers 2013-02, Universidad Torcuato Di Tella.
    2. Jens Christensen & James Gillan, 2011. "Has the Treasury benefited from issuing TIPS?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue apr18.
    3. 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.

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