alan greenspan the chairman of the federal reserve made the following remarks concerning the advantages of...
alan greenspan the chairman of the federal reserve made the following remarks concerning the advantages of introducing TIPS: "by routine monitoring markets for the indexed and unindexed debt instruments, the federal reserve could extract the market evaluation of the consequences of policy operation"
a) do you agree with this view?
b) what are the potential problems of inferring expectations from market prices?
Homework Answers
TIPS(Treasury inflation-protected securities) are an effective method and simple way to eliminate the inflation risk from fixed return investments with return guaranteed by the government.The main advantage is providing hedged against inflation risk but the issuing TIPS requires more cost in comparison to normal security. TIPS have requirement of continuous monitoring and adjustment. so, I am agreeing the view of Mr Green span on the "by routine monitoring markets for the indexed and un-indexed debt instruments, the federal reserve could extract the market evaluation of the consequences of policy operation"
Answer b ) In simple term the market expectation may consider as a principle to match with the future price of asset , by adjusting the futures price by parameters and variables with the time-varying risk premium. The major problem in the market expectation is estimation of the risk premium, and factors of estimation of the risk premium.
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