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

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

Abstract

Several studies have shown that, ex-post, the issuance of Treasury Inflation-Protected Securities (TIPS) has cost U.S. taxpayers money. We propose that evaluations of the TIPS program be more comprehensive and focus on the ex-ante costs of TIPS issuance versus nominal Treasury issuance and, especially when these costs are negligible, the more difficult-to-measure benefits of the program. Our study finds that the ex-ante costs of TIPS issuance versus nominal Treasury issuance are currently about equal and that TIPS provide meaningful benefits to investors and policymakers.

Suggested Citation

  • William Dudley & Michelle Steinberg Ezer & Jennifer E. Roush, 2008. "The case for TIPS: an examination of the costs and benefits," Staff Reports 353, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:353
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    References listed on IDEAS

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    1. Michael J. Fleming & Neel Krishnan, 2012. "The microstructure of the TIPS market," Economic Policy Review, Federal Reserve Bank of New York, vol. 18(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.
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    5. 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.
    6. Fleming, Michael J. & Mizrach, Bruce & Nguyen, Giang, 2018. "The microstructure of a U.S. Treasury ECN: The BrokerTec platform," Journal of Financial Markets, Elsevier, vol. 40(C), pages 2-22.
    7. 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.
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    9. Frederic S. Mishkin, 2007. "Inflation Dynamics," International Finance, Wiley Blackwell, vol. 10(3), pages 317-334, December.
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    Citations

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    Cited by:

    1. Jochmann, Markus & Koop, Gary & Potter, Simon M., 2010. "Modeling the dynamics of inflation compensation," Journal of Empirical Finance, Elsevier, vol. 17(1), pages 157-167, January.
    2. Martin M Andreasen & Jens H E Christensen & Simon Riddell, 2021. "The TIPS Liquidity Premium [Decomposing real and nominal yield curves]," Review of Finance, European Finance Association, vol. 25(6), pages 1639-1675.
    3. Paul J. Haensly, 2016. "Is a pure TIPS strategy truly risk free?," Review of Financial Economics, John Wiley & Sons, vol. 28(1), pages 1-20, January.
    4. Harsh Parikh & Rama K. Malladi & Frank J. Fabozzi, 2020. "Preparing for higher inflation: Portfolio solutions using U.S. equities," Review of Financial Economics, John Wiley & Sons, vol. 38(3), pages 542-554, July.
    5. John Y. Campbell & Robert J. Shiller & Luis M. Viceira, 2009. "Understanding Inflation-Indexed Bond Markets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 79-138.
    6. Alessandro Missale, 2012. "Sovereign debt management and fiscal vulnerabilities," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 157-176, Bank for International Settlements.
    7. 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.
    8. 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.
    9. 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,Facultad de Economía, CEDE, vol. 78, February.
    10. Pu Shen, 2009. "Developing a liquid market for inflation-indexed government securities: lessons from earlier experiences," Economic Review, Federal Reserve Bank of Kansas City, vol. 94(Q I), pages 89-113.
    11. Carolin E. Pflueger & Luis M. Viceira, 2011. "Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity," Harvard Business School Working Papers 11-094, Harvard Business School, revised Sep 2013.
    12. Jens H. E. Christensen & James M. Gillan, 2011. "A model-independent maximum range for the liquidity correction of TIPS yields," Working Paper Series 2011-16, Federal Reserve Bank of San Francisco.
    13. de Roode, F.A., 2014. "Model uncertainty in financial markets : Long run risk and parameter uncertainty," Other publications TiSEM c425daf8-c7a3-4ea4-8b18-3, Tilburg University, School of Economics and Management.
    14. John Y. Campbell & Robert J. Shiller & Luis M. Viceira, 2009. "Understanding Inflation-Indexed Bond Markets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 79-138.
    15. William Grant, 2022. "TIPS for Teaching: Bridging Macro and Micro Concepts with Inflation-Protected Securities," Journal of Economics Teaching, Journal of Economics Teaching, vol. 7(2), pages 103-120, May.
    16. Patricia Gomez-Gonzalez, 2021. "Drivers of inflation-linked public debt: an empirical investigation," International Economics and Economic Policy, Springer, vol. 18(1), pages 223-244, February.
    17. Juan Andrés Espinosa-Torres & Luis Fernando Melo-Velandía & José Fernando Moreno-Gutiérrez, 2015. "Expectativas de inflación, prima de riesgo inflacionario y prima de liquidez: una descomposición del break-even inflation para los bonos del gobierno colombiano," Borradores de Economia 13700, Banco de la Republica.
    18. 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.
    19. Thorsten Lehnert & Aleksandar Andonov & Florian Bardong, 2009. "TIPS, Inflation Expectations and the Financial Crisis," LSF Research Working Paper Series 09-09, Luxembourg School of Finance, University of Luxembourg.
    20. Haensly, Paul J., 2016. "Is a pure TIPS strategy truly risk free?," Review of Financial Economics, Elsevier, vol. 28(C), pages 1-20.
    21. Christensen, Jens H.E. & Gillan, James M., 2022. "Does quantitative easing affect market liquidity?," Journal of Banking & Finance, Elsevier, vol. 134(C).
    22. Michelle L. Barnes & Zvi Bodie & Robert K. Triest & J. Christina Wang, 2009. "TIPS scorecard: are TIPS accomplishing what they were supposed to accomplish?: can they be improved?," Public Policy Discussion Paper 09-8, Federal Reserve Bank of Boston.
    23. 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.
    24. Jens H. E. Christensen & James M. Gillan, 2013. "Does Quantitative Easing Affect Market Liquidity?," Working Paper Series 2013-26, Federal Reserve Bank of San Francisco.

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    Keywords

    Government securities; Treasury bonds; Inflation risk; Liquidity (Economics);
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