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Tips Scorecard: Are Tips Accomplishing What They Were Supposed to Accomplish? Can They Be Improved?

55 Pages Posted: 8 Dec 2009 Last revised: 9 Mar 2010

Michelle L. Barnes

Federal Reserve Bank of Boston

Zvi Bodie

Boston University - Department of Finance & Economics

Robert K. Triest

Federal Reserve Bank of Boston - Research Department; Boston College

J. Christina Wang

Federal Reserve Bank of Boston

Date Written: September 1, 2009

Abstract

In September 1997, the U.S. Treasury developed the TIPS market in order to achieve three important policy objectives: (1) to provide consumers with a class of assets that allows for hedging against real interest rate risk, (2) to provide holders of nominal contracts a means of hedging against inflation risk, and (3) to provide everyone with a reliable indicator of the term structure of expected inflation. This paper evaluates progress toward the achievement of these objectives and analyzes prospective ways to better meet these objectives in the future, by, for example, extending the maturity of TIPS and/or the use of inflation indexes suited to particular geographic regions or demographics. We conclude by arguing that while it is tempting to consider completing markets by introducing more TIPS - like securities indexed to inflation rates more tailored to particular demographics, our analysis suggests that TIPS indexed to CPI do, in fact, facilitate good synthetic hedges against unexpected changes in inflation for many different investors, since the various inflation measures are very highly correlated. We do, however, argue for extending the maturity of TIPS.

JEL Classification: G10, G11, G18

Suggested Citation

Barnes, Michelle L. and Bodie, Zvi and Triest, Robert K. and Wang, J. Christina, Tips Scorecard: Are Tips Accomplishing What They Were Supposed to Accomplish? Can They Be Improved? (September 1, 2009). FRB of Boston Public Policy Discussion Paper No. 09-8. Available at SSRN: https://ssrn.com/abstract=1520569 or http://dx.doi.org/10.2139/ssrn.1520569

Michelle L. Barnes (Contact Author)

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Zvi Bodie

Boston University - Department of Finance & Economics ( email )

United States

HOME PAGE: http://www.zvibodie.com

Robert Triest

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States
617-973-3431 (Phone)
617-973-3957 (Fax)

Boston College ( email )

Chestnut Hill, MA 02167
United States

J. Christina Wang

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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