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


  • William Dudley
  • Jennifer E. Roush
  • Michelle Steinberg Ezer


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.

Suggested Citation

  • William Dudley & Jennifer E. Roush & Michelle Steinberg Ezer, 2009. "The case for TIPS: an examination of the costs and benefits," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 1-17.
  • Handle: RePEc:fip:fednep:y:2009:i:jul:p:1-17:n:v.15no.1

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    References listed on IDEAS

    1. 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.
    2. Fleming, Michael J, 2002. "Are Larger Treasury Issues More Liquid? Evidence from Bill Reopenings," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 707-735, August.
    3. Stefania D'Amico & Don H Kim & Min Wei, 2008. "Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices," BIS Working Papers 248, Bank for International Settlements.
    4. Andrew Ang & Geert Bekaert & Min Wei, 2008. "The Term Structure of Real Rates and Expected Inflation," Journal of Finance, American Finance Association, vol. 63(2), pages 797-849, April.
    5. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, June.
    6. Michael Fleming & Bruce Mizrach, 2008. "The Microstructure of a U.S. Treasury ECN: The Brokertec Platform," Departmental Working Papers 200803, Rutgers University, Department of Economics.
    7. 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.
    8. Frederic S. Mishkin, 2007. "Inflation Dynamics," International Finance, Wiley Blackwell, vol. 10(3), pages 317-334, December.
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    Cited by:

    1. Guido Sandleris & Mark L.J. Wright, 2013. "GDP-Indexed Bonds: A Tool to Reduce Macroeconomic Risk?," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    2. Jens H. E. Christensen & James M. Gillan, 2011. "Has the Treasury benefited from issuing TIPS?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue apr18.
    3. Grishchenko, Olesya V. & Vanden, Joel M. & Zhang, Jianing, 2016. "The informational content of the embedded deflation option in TIPS," Journal of Banking & Finance, Elsevier, vol. 65(C), pages 1-26.
    4. Juan Andrés Espinosa-Torres & Luis Fernando Melo-Velandia & José Fernando Moreno-Gutiérrez, 2017. "Expectativas de inflación, prima de riesgo inflacionario y prima de liquidez: una descomposición del break-even inflation para los bonos del Gobierno colombiano," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, vol. 78, February.
    5. 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.
    6. Haensly, Paul J., 2016. "Is a pure TIPS strategy truly risk free?," Review of Financial Economics, Elsevier, vol. 28(C), pages 1-20.

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