Could the U.S. Treasury Benefit from Issuing More TIPS?

Authors

James M. Gillan

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2011-16 | June 1, 2012

Yes. We analyze the economic benefit of Treasury Inflation Protected Securities (TIPS) issuance by estimating the inflation risk premium that penalizes nominal Treasuries vis-a-vis TIPS and the cost derived from TIPS liquidity disadvantage. To account for the latter, we introduce a novel model-independent range for the liquidity premium in TIPS exploiting additional information from inflation swaps. We also adjust our model estimates for finite-sample bias. The resulting measure provides a lower bound to the benefit of TIPS, which is positive on average. Thus, our analysis suggests that the Treasury could save billions of dollars by significantly expanding its TIPS program.

Article Citation

Gillan, James M., and Jens H. E. Christensen. 2011. “Could the U.S. Treasury Benefit from Issuing More TIPS?,” Federal Reserve Bank of San Francisco Working Paper 2011-16. Available at https://doi.org/10.24148/wp2011-16

About the Author
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Jens Christensen is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Jens Christensen