TIPS for Teaching: Bridging Macro and Micro Concepts with Inflation-Protected Securities

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Treasury Inflation-Protected Securities (TIPS) are useful for teaching how the microeconomic tools of consumer choice are related to key macroeconomic variables like inflation, real interest rates, and monetary policy. This paper applies the contingent-states model of optimal choice to tradeoffs between regular U.S. Treasury bonds and inflation-protected bonds, providing a new application for bridging intermediate micro and macro. As financial data and contemporary policy actions unfold during a semester, students can connect budget constraints and indifference curves to personal financial decisions and the larger macroeconomic environment.

William Grant