NGDP targeting with a futures market

Scott Sumner has been advocating nominal GDP targeting by the Fed for some time now.  He's recently added more meat to that idea by tying the target to a Fed-backed futures market.

This is a slight twist on inflation targeting, which seems theoretically sound but requires a credible commitment by the Fed to keep monetary policy loose well after the economy recovers.  That could be a tough commitment to make, especially with Ron Paul as the new overseer.

I don't know that I fully understand Scott's idea, but I think it basically takes care of the commitment problem by creating huge arbitrage opportunities to the market if a target NGDP isn't reach.  Which basically means we'll either get the inflation or we'll get the growth, and probably a little of each, since it is very hard for me to see how we won't get a lot of real aggregate demand growth with a bit more inflation.  This is because, with a bit of inflation, nominal debt burdens will decline, asset values will increase (re, houses) and people will be able to spend more, in real terms.  If we reach the target in real terms, well that's obviously good news too.

In other words, good bye business cycle.

On the surface, it seems like a compelling idea. It seems like there should be a gaping hole in this somewhere.  But I can't figure out what it is.

The Fed would still have a management job of gradually adjusting target NGDP according to growth in economic potential.  But that seems like a pretty easy thing to do and the policy would be fully transparent.

A few links:
Brad Delong [1, 2]
Bill Woolsey
Arnold Kling

Kling's skepticism doesn't strike me as compelling. Some of the other commentary looks very intelligent, but I have to think a lot more to understand them, and I don't have time for that right now  %-)

Somehow I think this idea is going to bubble around for a while.  It makes some sense and has the air of a nice ideological compromise.  (Unlike the not-so-nice, hold-your-breath Money for Everyone! compromise that Obama just signed.)  It would provide necessary stimulus, which appeals to liberals, but fairly modest and nearly automated government management of the money supply.


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