Nominal GDP Futures Targeting
Scott Sumner, Bentley University
Neoliberal revolution
• After 1980 there was a worldwide move toward
deregulation, privatization, and other marketfriendly policies.
• Monetary policy has remained centrally
planned.
• Monetary policy failed in 2008-09, allowing the
sharpest drop in aggregate demand since 1938.
• Lars Svensson—Target internal Fed forecasts
• Alternative approach, NGDP futures targeting
NGDP futures targeting, one step at a
time
• Set policy instrument at the level of the
median vote of the FOMC
• Reward or punish FOMC members based on
the accuracy of their vote.
• Allow anyone to vote on the FOMC.
• Switch from “one-man-one-vote” to “onedollar-one-vote,” as in financial markets.
Four types of NGDP futures targeting
• NGDP futures targeting—base adjusted daily via
parallel OMOs.
• Policy instrument forecasting—multiple auctions
contingent on various instrument settings. Only
those bids contingent on equilibrium in futures
market are executed.
• Indexed Interest on reserves (Robert Hall, 1983.)
• Index Futures convertibility (Bill Woolsey, 1992,
2013.)
Mechanics of one form of NGDP
futures targeting
• Assume 3.65% annual NGDP growth target, level
targeting. Increase NGDP target by one basis
point daily.
• Estimate daily NGDP by weighted average of
consecutive periods (months or quarters.) Target
second revision—ignore revisions that reflect
definitional changes in NGDP.
• Have the Fed create an NGDP futures market, and
stand willing to buy and sell unlimited quantities
at the target price.
Mechanics of NGDP futures targeting,
continued
• Have traders put 10% into market accounts.
Pay enough interest on margin accounts to
assure market liquidity. I.e., pay an amount
equal to the interest rate on one year T-bills,
plus $1,000,000/number of contracts traded.
• Increase the monetary base by a fixed
proportion to all short sales of NGDP futures.
Decrease the monetary base by a fixed
proportion to all long positions taken.
NGDP futures targeting mechanics,
continued
• After second revision of NGDP data, pay investors their
margin account balance, plus interest, plus or minus
the percentage difference between actual NGDP and
target NGDP, times the value of the contract.
• Assume contracts are for $1000, and margin accounts
are 10%, and earn a rate of 4% plus the bonus. Assume
500,000 contracts are traded. The bonus is $2 per
contract. Total interest is $6 ($4 plus $2). If NGDP
came in 1% below target, then an investor who went
long would receive $96 dollars back when NGDP is
announced. That’s $100 plus $4 plus $2 minus $10. An
investor who went short would receive $116.
Criticisms of NGDP futures targeting
• The “circularity problem:” (Bernanke and Woodford
1997, also Garrison and White, 1997.) Does not apply
to the four regimes considered here. Applies to
regimes where the central bank adjusts the base in an
attempt to stabilize NGDP futures market. The key is to
have the market predict the base setting that stabilizes
NGDP, and not predict NGDP itself.
• First mover problem; why would investors trade before
the end of the period? (Garrison and White, 1997) Key
is to make periods very short, perhaps one day. Set
base at the beginning of each period at level expected
for final equilibrium, taking account of predictable day
of week and seasonal factors.
Criticism, continued
• Revisions to NGDP: Target the second revision. Use
Gross Domestic Income, which (conceptually) is
identical, but is subject to smaller revisions. Use old
methodology when there are conceptual changes (such
as adding the underground economy, or intellectual
capital.) Then allow “base drift” to transition to new
system.
• Market liquidity? Studies show that small prediction
markets can be surprisingly effective. Small subsidies
are probably not needed, but can be added by paying
above market rates on margin accounts. No one
worries about lack of trading when the central bank
targets gold prices, or forex prices. Think “guardrails.”
Criticism, continued
• Risk premium? It’s a good thing that no NGDP
futures market currently exists—suggests little
interest in hedging NGDP risk. Small risk
premium. Studies suggest that risk premium is
unlikely to be of macroeconomic importance,
especially if not time-varying.
• Bubbles? Put aside the fact that “bubbles”
probably don’t exist. If they do, it’s probably due
to “groupthink,” which is likely to be much worse
on a small FOMC than a large FOMC. Markets
vastly out-performed the Fed in late 2008.
Criticism, continued
• Market manipulation? Studies suggest it is not
generally a problem, but it could be for NGDP
futures. Initially we should allow Fed to offset
suspicious trades, over time we can look at the
Fed’s track record.
• Balance sheet risks: Probably not a major factor,
but can be reduced by leveraging NGDP futures
trades, so that the base moves by many times the
net short or long position in the futures market.
Criticism, continued
• Too radical? For the moment. But the Fed
should set up an NGDP futures market
anyway, if only for study purposes. Over time
it will play an increasingly large role in policy
decisions, just as the TIPS spreads are playing
an increasingly large role. Woolsey’s approach
is the most politically feasible in the short run,
Hall’s in the long run (when paper currency
has disappeared.)
Other advantages
• Overcomes zero bound problem, or perhaps it’s
more accurate to say it more clearly identifies
what the real problem is---large central bank
balance sheets at zero nominal rates.
• Eliminates need for corporate bailouts, fiscal
stimulus.
• Stable NGDP expectations are a good thing, in
and of themselves, regardless of actual NGDP
movements. Stable NGDP expectations lead to
more stable asset prices, and hence less
instability in actual NGDP.
Concluding remarks
• Similar to gold standard, except it stabilizes
expectations of Hayek’s preferred target (nominal
income), rather than the price of gold.
• Future research may find even better targets. I suspect
the “total nominal wages and salaries” aggregate is
better than NGDP, especially for small economies
susceptible to large real shocks.
• It’s a scandal that the federal government has not
created and subsidized trading in a NGDP futures
market, which could provide essential real time data on
expected demand growth at low cost.