Pragmatic Capitalism

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Nominal Future GDP Targeting

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Does nominal future GDP targeting make any sense under operational reality?

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Posted by MachineGhost
Posted on 07/25/2016 12:53 PM
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No, there’s two big problems with NGDP futures:

1) They have no viable transmission mechanism. Sumner says you can just have the Fed set a target rate and the market will track that. As if normal people will go out and spend 5% of their income every year just because the Fed sets a NGDP target of 5%. How does he think this will happen? A magic wand? I know the transmission mechanisms he thinks will work such as expectations or QE, etc, but we’ve seen that all play out. The Fed can’t force people to spend more even when it tries to convince them of a very high rate of inflation down the line….So, I just don’t see how the policy translates to real spending in the first place….

2) The second is market based. The bottom line is, a NGDP futures market would get manipulated by traders like crazy. Mike Sankowski explained this a few years ago:

Here’s another good explanation from Zachary David:

And another good one by Brian Romanchuk:

These guys, like myself, are all traders. Mike builds futures contracts. Scott Sumner writes theoretical papers about this stuff and really has no idea what he’s talking about when it comes to market structure. The funny thing is, we can’t ever say Sumner is wrong because the idea will never get tested because the market structure won’t work well enough for a viable test. So, he can just swat at everyone who criticizes him…..

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Cullen Roche Posted by Cullen Roche
Answered on 07/25/2016 1:04 PM
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    Just in case you missed it – more on the transmission channel issue…
    wander down to the bottom to see comments by Stone and JKH

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    Posted by Poseidons Bear
    Answered on 07/25/2016 5:26 PM
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      Isn’t the Fed targeting a growth rate now? How is this different then what’s happening now. Aren’t treasury futures the proxy for the theoretical new contracts.

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      Posted by smith1111
      Answered on 07/27/2016 11:26 AM