Has the program been a good development from the perspective of the U.S. Treasury? What about from the public’s perspective? A good starting point for answering these questions is to account for the costs and benefits of the program relative to an appropriate counterfactual. For example, we might start by comparing the difference in funding costs to the Treasury of TIPS versus a program of comparable duration nominal Treasuries. But we should also be careful not to ignore other potential benefits of the TIPS program. As we see it, these potential benefits include:  BIS Review 14/2009  1  •  the provision of a virtually risk-free investment that provides value to risk-averse investors,  •  access to a market-determined measure of inflation expectations that can help inform the conduct of monetary policy,  •  greater diversification of the Treasury’s funding sources, which presumably has favorable implications for the Treasury’s overall funding costs, and  •  the potential for TIPS issuance to reduce the variability of the U.S. government’s net financial position and provide an explicit incentive for the fiscal authorities to conduct policy with an eye toward the consequences of inflation. Although it is difficult to quantify these benefits, we argue that they are meaningful and should not be ignored in evaluating the benefits of the TIPS program.
In Europe, the ECB’s deposit facility rate was already set at -0.5% before the COVID-19 crisis.6 In our statements, we have stressed that this rate could be further lowered in the future. Yet in any event, looking back it seems clear that conventional monetary policy — i.e. that based on controlling the short-term interest rate — has less scope for action than, for example, a few decades ago. The lower bound on interest rates generates asymmetry in monetary policy conduct. As I commented earlier, if inflation rises above its target, central banks may increase interest rates as much as necessary in order to “cool” the economy. However, in the face of deflationary shocks driving inflation below its target and leading the central bank to cut its interest rates, these may ultimately “collide” with their lower bound. This asymmetry makes monetary policy potentially very effective for combating inflation, but less so for combating deflation or even persistently low inflation. The latter may lead to a dangerous vicious circle. Against a backdrop where central banks’ hands are expected to be frequently tied by the lower bound on interest rates, economic agents will expect any inflation overshooting to be corrected swiftly. However, this is not the case for undershooting. Therefore, average expected inflation over a long period will tend to run below target.