Inflation-IndexedBondsHowDoTheyWork.pdfVIP

How Capital Taxes Harm Economic Growth: Britain Versus the United States Lee E. Ohanian Inflation-Indexed Bonds: How Do They Work? Jeffrey M. Wrase* In a Newsweek article in 1971, economist and Friedman and a host of commentators before Nobel Laureate Milton Friedman scolded the and after him, the U.S. Treasury has unveiled government for repaying its debt in dollars an “inflation-protection security.” This new se- whose value is eroded by inflation. His prescrip- curity, also known as an inflation-indexed or tion was to: inflation-linked bond, is designed to protect the purchasing power of an investor’s savings by “Let the Treasury promise to pay not $1,000 indexing interest and principal payments to but a sum that will have the same purchasing consumer prices. If prices go up, so, too, do power as $1,000 had when the security was dollar payments from an indexed bond. There- issued. Let it pay as interest each year not a fore, holders of indexed bonds aren’t hurt by fixed number of dollars but that number ad- inflation. justed for any rise in prices.” The Treasury started its indexed bond pro- gram in January 1997 by issuing 10-year infla- Now, 26 years after the urging of Professor tion-protection bonds, with principal and in- terest payments linked to the consumer price index for all urban consumers (CPI-U). The in- *Jeff Wrase is a senior economist in the Research De- partment of the Philadelphia Fed. This article is available dexing program will expand to include bonds on the Internet at /econ/br/ of different maturities and other types of finan- brja97jw.pdf.