My new nominal GDP futures paper

Lots of people ask me for a paper explaining NGDP futures targeting.  Here it is (published by the Mercatus Center.)

BTW, I now think it might have been better to call it a “prediction market,” as that would have avoided a lot of misunderstanding.  You’ll see why if you read the paper.




12 Responses to “My new nominal GDP futures paper”

  1. Gravatar of Basil Basil
    26. July 2013 at 09:39

    This is such excellent timing. I just today read your paper “Let a Thousand Models Bloom”, which this paper appears to be an extension of?

    However, after reading the Mercatus paper, I am curious about an issue that I brushed aside when reading the 2006 paper. When an investor purchases a contract, an open market sale is triggered. In the Mercatus paper, you suggest that this should trigger an OMP of $1,000.

    Now, this is sort of minor, but the $1,000 purchase rule – that number is totally arbitrary, correct? It’s just a number that’s small enough to allow for precise market control over the monetary base but large enough that the Fed doesn’t have to make trillions of $1 purchases every month. Is that a fair assessment?

    [I’m a big fan of the whole idea, by the way, and really like your framework of the different interpretations over what monetary policy attempts to control – monetary aggregates, the price of money, or the rental cost of money.]

  2. Gravatar of Basil Basil
    26. July 2013 at 09:53

    Or is the idea that a purchase of a $1,000 NGDP contract triggers a $1,000 open market purchase (i.e. the open market purchase/sale is equivalent in size to the contract size)?

  3. Gravatar of ssumner ssumner
    26. July 2013 at 10:11

    Basil, Yes, it would be leveraged, and as always in economics there are tradeoffs:

    1. Bigger leverage means less risk to the Fed, and also less cost in subsidizing trading of NGDP futures.
    2. Less leverage (bigger NGDP futures market) means a more accurate forecast.

  4. Gravatar of Ideology and monetary policy shouldn´t mix | Historinhas Ideology and monetary policy shouldn´t mix | Historinhas
    26. July 2013 at 10:32

    […] Scott Sumner just published “A market-driven nominal income targeting regime” at The Mercatus Center, in […]

  5. Gravatar of Saturos Saturos
    26. July 2013 at 10:45

    Before I dive into this tomorrow – this is going to be something like your magnum opus (so far), isn’t it? Should be pretty epic, I’m looking forward to it.

  6. Gravatar of Justin Irving Justin Irving
    26. July 2013 at 11:31


    I’d say this is in the top three market monetarist documents I’d give to someone interested in getting a sense of what it’s all about.

  7. Gravatar of ssumner ssumner
    26. July 2013 at 11:41

    Thanks Justin.

    Justin and Saturos, I think this complements my other Mercatus paper on NGDP targeting (not futures) which came out earlier. The third might be my earlier papers on the crash of 2008.

    I’ve written another Mercatus paper on monetary offset that will come out soon—but it’s a much shorter paper than the two NGDP papers.

  8. Gravatar of JJriverrun JJriverrun
    26. July 2013 at 11:55

    Beautiful. I found section 4 to be very accessable (and convincing) for casual observers and those unfamiliar with MM.

    One part that didn’t make much sense to me, and wasn’t answered later in the paper as best as I could tell:

    ” 1. Have each FOMC member vote on the optimal policy-instrument setting, and then set the policy at the median vote.
    2. Reward or fine each FOMC member based on the accuracy of his or her implied NGDP forecast.
    3. Open up the FOMC to anyone who wishes to participate.
    4. Shift from a one-man, one-vote system to a one-dollar, one-vote system.”

    Does point 2 assume that there is still a 12 member FOMC? Why is it necessary and what would it accomplish?

    If you could elaborate on this process a little more, it would be appreciated.

  9. Gravatar of ssumner ssumner
    26. July 2013 at 13:06

    JJriverrun, I was trying to show a step by step shift. In the end you would abandon the 12 member board, and have it completely open.

  10. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    26. July 2013 at 13:22

    Very nicely done. I tried my hand at a Reader’s Digest Condensed Version;

    Hope I didn’t misrepresent any of your ideas.

  11. Gravatar of Henry Henry
    27. July 2013 at 00:08

    Epic. Absolutely epic. Finally all my questions about implementation feasibility fully answered. I especially like the step by step guide for the gun-shy central banks. I’ve always felt that there is consensus on the theoretical superiority of NGDP targeting, but implementation is where people are having doubts. The hurdle to NGDP futures targeting is simply too large and the risks too high to for central banks to experiment. Your step-by-step lowers this hurdle and reduces the scale to a manageable level. The data from a mini NGDP futures market can then be used by central bank chairmen to win political debates with the committee and push for further reform.

    Central bank superstars like Mark Carney and Stan Fischer have both openly criticized the implementation details of NGDP targeting while admitting its superiority. This paper will no doubt help move the needle on implementation.

  12. Gravatar of ssumner ssumner
    27. July 2013 at 05:45

    Patrick, Very good.

    Thanks Henry.

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