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Can the Market Set Better Monetary Policy Than the Fed?

The Big Question

Currently, US monetary policy is largely based on the Federal Reserve targeting inflation to keep the economy stable. That means it ensures that inflation—the increase in the prices of goods and services—does not venture too far from 2 percent. But for years, inflation has stayed below 2 percent and all the while, we have not seen strong levels of economic growth.

The 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. 

According to Sumner and Beckworth, instead of targeting inflation, 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.

But how do you determine if monetary policy is set appropriately to produce stable growth in NGDP? Let’s let the market decide, Sumner and Beckworth hypothesize. 

The Experiment

The Mercatus Center 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 each of President Trump’s first two years. 

How It Works — And How You Can Win Amazon Gift Prizes

To participate, go to hypermind.com and click “Register.” You’ll be prompted to answer a few simple questions. You’ll then receive an invitation to start forecasting! 

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

What We Hope to Find

The project’s goal is to determine whether the market can adequately determine the trajectory of NGDP growth and whether the Fed should use this information to inform policymaking and to move towards an NGDP level targeting regime.

CLICK HERE TO PARTICIPATE

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until Year 2 begins!

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Than the Fed?