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

17 Pages Posted: 16 Jul 2009

See all articles by William Dudley

William Dudley

Federal Reserve Bank of New York

Jennifer E. Roush

Federal Reserve Board - Division of Monetary Affairs

Michelle Steinberg

Federal Reserve Banks - Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 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

Dudley, William and Roush, Jennifer E. and Steinberg, Michelle, The Case for Tips: An Examination of the Costs and Benefits (July 1, 2009). Economic Policy Review, Vol. 15, No. 1, July 2009. Available at SSRN: https://ssrn.com/abstract=1434111 or http://dx.doi.org/10.2139/ssrn.1434111

William Dudley (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Jennifer E. Roush

Federal Reserve Board - Division of Monetary Affairs ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2897 (Phone)
202-263-4850 (Fax)

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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