Interest rates were cut faster and more than would have been justified on the basis of historical behaviour. Between the third quarter of 2008 and the third quarter of 2009, the Riksbank cut its policy rate from 4.5 per cent to 0.3 per cent, a cut of 4.2 percentage points in the space of one year. We did not hit the lower bound. GDP growth and inflation did fall, but the falls were less severe and not as prolonged as would have been the case if we had not acted so forcefully. The falling trend in the long-term real interest rate has increased the risk that we may hit the lower bound more often in the future, even if we are not sure where 22 See Brainard (1967). 23  See Apel et al. (1999). 24 See, for instance, Söderström (2002). 21 [24]  it lies. In such a situation monetary policy should act more aggressively on negative impulses. Unconventional measures, such as extensive government bond purchases, may be an important measure. 25 Economists are alternatively criticised for being one-handed or two-handed – either we are too one-sided in our considerations and recommendations, or else there is too much of on the one hand and on the other hand. I mentioned earlier that “it depends” how monetary policy should react to uncertainty. When the uncertainty concerns long-term trends, monetary policy should act more cautiously. But this is not a general principle.
As a result, by issuing securities in a segmented TIPS market, the Treasury may keep realized yields on bill and nominal coupon securities lower than they otherwise would have been. The last noteworthy fiscal benefit from TIPS issuance is the fact that it reduces risk to the U.S. government in terms of the variability of its net financial position. The rate of inflation influences both the cost of TIPS and the government’s tax receipts. Thus, some level of TIPS issuance may reduce the variability of the government’s net financial position. This, in turn, should lead to a more regular and predictable pattern of issuance, which should help minimize interest costs. In summary, our analysis of the ex-ante costs of the TIPS program and the more difficult-tomeasure benefits suggests that TIPS issuance provides at least a modest net benefit to the Treasury. So, now I want to turn to a related question: Are there ways to increase the benefits? 6  See Fleming (2002), Krishnamurthy (2002), Laubach (2003). BIS Review 14/2009  5  I would be willing to make two modest suggestions here. First, it may make sense to emphasize longer-dated TIPS issuance rather than shorter-dated issuance. Analytically, the logic goes as follows. Inflation uncertainty is likely to increase at longer time horizons. Thus, investors are likely to pay a greater premium for inflation protection at longer-time horizons. This implies that the cost savings associated with TIPS are likely to be greater for longer maturities rather than shorter maturities.