they would purchase tips at a price above that implied by their expected payment stream. as such, inflation risk premiums result in lower expected borrowing costs for the government and savings for the tips program compared with nominal issuance. to determine which factor has been historically dominant, we conduct an ex - ante cost analysis : we compare the amount that the treasury received for inflation compensation at auction with an observable measure of the inflation expectations of tips investors that is not contaminated by premiums for inflation risk or liquidity differentials. unfortunately, we don ’ t have a perfect measure of expected inflation. nevertheless, we may be able to get close. we do have estimates of expected inflation from other sources – such as the survey of professional forecasters ( spf ) conducted by the federal reserve bank of philadelphia. if such measures do indeed reflect the inflation expectations of investors, then we can conduct a reasonably accurate ex - ante analysis. tips analysts often talk about a concept they call the breakeven inflation rate. essentially, this is the realized inflation rate that would cause investors to come out the same in terms of total compensation regardless of whether they had bought tips or nominal treasuries. the difference between the auction breakeven inflation rate and the spf forecast yields a measure of the net savings or loss incurred by the treasury that is independent of forecast errors. it is also equal to the net value of the illiquidity and inflation risk premiums associated with each tips. our analysis, which covers tips auctions through april 2008, found that prior to 2004, the breakeven inflation rate was below the spf. this indicates that the illiquidity premiums exceeded the inflation risk premium over this period. however, since 2004, we find that breakeven inflation rates were approximately equal to expected inflation, indicating that investors were roughly indifferent between the benefit of being protected against inflation risk versus the cost in terms of the greater illiquidity of tips relative to onthe - run nominal treasuries. thus, on an ex - ante basis, it appeared that the cost of issuing tips was about equal to the cost of issuing nominal treasuries. to determine the impact of the illiquidity premium and inflation risk premium on these results, we decomposed our ex - ante analysis, comparing the breakeven rate of inflation excluding the illiquidity premium in tips yields 3 to the spf forecast. this comparison yields an in addition

jens weidmann : crisis economics – the crisis as a challenge for economists lecture by dr jens weidmann, president of the deutsche bundesbank, at the annual gala meeting of the munich volkswirte alumni, munich, 13 june 2013. * 1. * * welcome mr baader members of the munich volkswirte alumni - club ladies and gentlemen i would like to extend a very warm welcome to you here at the deutsche bundesbank in munich. at the same time, i wish to thank the volkswirte alumni - club for inviting me to give this year ’ s lecture. even at the bundesbank, it is not every day that so many economists are gathered together, and the bundesbank employs a large number of economists. i would therefore like to take this as an opportunity to talk about economists and their role in the crisis. before that, however, i would like to offer my sincere congratulations to this evening ’ s prize winners on receiving their awards. 2. have economists failed? on 6 april 2009, a severe earthquake occurred in the central italian town of l ’ aquila with the tragic loss of more than 300 lives. only six days earlier, there had been a meeting of a national commission for the forecast and prevention of major risks. afterwards, the experts made a public declaration that, despite a few tremors over the past few days, there was currently no heightened risk of an earthquake in the region. ladies and gentlemen i am telling you about this incident because it is possible to draw instructive parallels with the role played by economists in the crisis. in much the same way as seismologists are accused of not giving ample warning about the possibility of an earthquake, economists are accused of not giving ample warning about the looming financial and debt crisis. and much as engineers are accused of making buildings that are not earthquake - resistant, economists are accused of building design flaws into the financial and economic system, with whole nations now suffering under the consequences. economists have never had the best of reputations, even in the academic world. many may feel that the topics which occupy economists are too common or vulgar – such as money. as silvio gesell wrote in 1911, “ lofty idealists can easily find subjects of investigation more attractive than money. religion, biology, astronomy, for example, are infinitely more edifying than an investigation of the nature of money. ” by the way, silvio gesell himself found this object of investigation interesting