The Case for TIPS: An Examination of the Costs and Benefits

17 Pages Posted: 11 Nov 2008

See all articles by Jennifer E. Roush

Jennifer E. Roush

Board of Governors of the Federal Reserve System

William Dudley

Federal Reserve Bank of New York

Michelle Steinberg

Federal Reserve Banks - Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: March 2009

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.

Keywords: Inflation-indexed debt, Treasury Inflation-Protected Securities (TIPS), liquidity premium, inflation risk premium

JEL Classification: H63, G10, E6

Suggested Citation

Roush, Jennifer E. and Dudley, William and Steinberg, Michelle, The Case for TIPS: An Examination of the Costs and Benefits (March 2009). Available at SSRN: https://ssrn.com/abstract=1297369 or http://dx.doi.org/10.2139/ssrn.1297369

Jennifer E. Roush (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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William Dudley

Federal Reserve Bank of New York ( email )

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United States

Michelle Steinberg

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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