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

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractSeveral 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.

Pricing TIPS and Treasuries with Linear Regressions

“…We view our finding as a desirable feature, and it is indeed fully consistent with the intuitions 21 of Sack and Elsasser (2004) and Dudley, Roush and Ezer (2009) suggesting that variations in 5-10 year forward breakevens mainly reflects changes in inflation risk premia. Chernov and Mueller (2012) present an ATSM model where a "hidden factor" is extracted from inflation surveys.…”

“…It has long been argued that variations of 5-10 year forward rates mainly reflect changes in risk and illiquidity premia, not in inflation expectations (see Sack and Elsasser (2004) and Dudley, Roush and Ezer (2009)). Our model confirms that conjecture.…”

Does Quantitative Easing Affect Market Liquidity?

“…Fleming and Krishnan (2012) report market characteristics of TIPS trading that indicate smaller trading volume, longer turnaround time, and wider bid-ask spreads than are normally observed in the regular Treasury bond market (see also Sack and Elsasser 2004, Dudley et al 2009, and Fleckenstein et al 2014. However, the degree to which they bias TIPS yields remains a topic of debate because attempts to estimate TIPS liquidity premiums directly have generated varying results.…”

The Microstructure of the TIPS Market

“…Roush (2008) finds that TIPS have saved the government money, except during the early years of the program. Dudley, Roush, and Ezer (2009) show that the ex ante costs of TIPS issuance are about equal to the costs of nominal securities issuance. 4 The data are available at http://www.newyorkfed.org/markets/ primarydealers.html.…”