Furthermore, the ability for investors to choose the amount of inflation risk they hold may result in a more optimal allocation of risk among investors with different tolerances. 5 How much is this worth? Is the value of this completely captured in the relative interest costs of TIPS? Probably not, because the relative interest costs between TIPS and nominal Treasuries are set at the margin. We think there is some value in having a high-quality hedge to inflation risk, especially one that is available to less sophisticated investors. Improved monetary policy The second noteworthy benefit from the TIPS program is that it helps improve the conduct of monetary policy. Foremost, the program provides up-to-date information about the evolution of inflation expectations and real interest rates. Because keeping inflation expectations wellanchored is so important in keeping inflation itself in check, real-time measures of inflation expectations may lead to better monetary policymaking. This, in turn, should improve macroeconomic performance. Although this is very difficult to quantify in terms of value, I think it is safe to say that in a $ trillion economy, even a modest improvement in performance generates large dollar benefits. U.S. policymakers focus on a variety of inflation expectation measures, including private surveys of inflation expectations and market based measures, such as TIPS breakeven inflation rates.
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.