September 19, 2017

Mercatus Announces Futures Market to Forecast Nominal GDP

Current US monetary policy is based largely on what economists call inflation targeting. This means that the US central bank, the Federal Reserve (the Fed), ensures that inflation—the general increase in prices—stays below or does not venture too far from 2 percent. The Federal Reserve keeps inflation below 2 percent by shifting the interest rate banks charge one another when they lend to each other overnight. This is called the federal funds rate, and it’s shifted up or down depending on economic trends, in order to increase or decrease the money supply in the economy.

Mercatus Center’s Scott Sumner and David Beckworth have made the case that an alternative monetary policy approach, nominal gross domestic product (NGDP) level targeting, is superior to inflation targeting. NGDP is essentially the nation’s total income. According to Sumner and Beckworth, instead of targeting inflation (general prices), the Federal Reserve’s monetary policy should target the rate at which the nation’s total income is expected to grow. NGDP level targeting will ensure that the right amount of money supply is provided to meet the economy’s needs.

To determine the right NGDP target, Sumner has suggested that Federal Reserve policymakers rely on a market for this information. Specifically, a futures market that trades one- or two-year forward NGDP futures contracts would prove useful. The market would determine the money supply and interest rate setting most likely to hit the Fed’s NGDP target.

To further this research, the Mercatus Center has sponsored the development of a futures market based on NGDP contracts with Hypermind, a UK-based prediction market. The market has been established with one contract based on the nominal GDP of the first year of President Trump’s administration (2017: Q1 to 2018: Q1), and another for the following year (2018:Q1 to 2019:Q1). Participants in this market can trade on what they think the rate of NGDP growth will be over President Trump’s first two years.

Participants do not invest any of their own money in the market. However, participants who make the correct trades (and hence the right prediction) about 2017’s and 2018’s NGDP, will win a money prize (in US dollars). Hypermind will distribute the total available prize, currently $70,000, among all participants in proportion to their individual performance on each contract.

The data we obtain from this experiment will inform our research on how NGDP expectations respond to economic and policy events.  Ultimately, the project’s goal is to determine whether the market can adequately determine the trajectory of NGDP growth and whether the Fed can use this information to inform policymaking and to move towards an NGDP level targeting regime. We are very excited about this project and we hope you will participate at Hypermind. To participate, you will have to first register at Hypermind.

Here you will see current expected NGDP growth rates from 2017-2018 and 2018 – 2019.