NGDP Targeting and NGDP Futures

NZIER's Kirdan Lees has called for the RBNZ to shift to NGDP (nominal GDP) targeting.

Recall that, currently, the RBNZ is supposed to target CPI inflation, over the medium term. The last part is important as it lets RBNZ look through temporary shocks. So if there's some silly blip from oil prices or commodity prices, they can just keep look at what things will be like over some undefined future period. While that lets them get away with persistent outcomes well in excess of target (Bollard) or well under target (Wheeler), it also means that targeting isn't as inflexible as it might otherwise be. And inflation expectations have remained reasonably anchored, though they're now drifting down.

Currently, RBNZ can target future inflation rates in a few ways. There are plenty of surveys of future inflation expectations. There's also the price difference between inflation-indexed and standard bonds. For a while, RBNZ used iPredict inflation forecasts, or at least cited them in a Monetary Policy Statement, but those forecasts largely mirrored ones you could get out of the rather more thickly traded bond markets.

How would you target NGDP? You'd need some mechanism for forecasting future NGDP. Sure, RBNZ has the big DSGE models for it, the latest version of which has an acronym nowhere near as memorable as the Kiwi Inflation Targeting Technology (KITT). But there aren't market prices out there on NGDP.

This was the problem Scott Sumner was trying to solve when I chatted with him at a conference in Hong Kong last year. He needed a way of getting NGDP forecasts to prove that NGDP targeting could be done. If you can get accurate forecasts, then you can use that in your targeting. I told him about how great NZ's regulatory structures are and that he should get in touch with the good people at iPredict. And so he did, and so there's now a US-facing version of iPredict that has a US no-action letter letting Americans trade on NGDP futures contracts.

But Simon Bridges just killed the New Zealand version of iPredict. So we can't have NGDP futures. So if we want NGDP targeting, it's going to be a lot harder. Thanks, Simon.

Well, unless we can convince the Americans to let foreign New Zealanders trade on the US-facing side of the NZ-based prediction market.

What a stupid stupid state of affairs.

The New Zealand National Party. Underestimating the compliance costs their regulations impose on small firms since at least Muldoon, and still going strong.

Update: I've been having issues in which Disqus is not synching comments made via the mobile version of the site and I have not had a chance to figure out how to fix it. And I cannot easily answer comments left that way. Belisarius asks what I make of the NZIER proposal. I'd hit that question in 2011 when NZPA asked RBNZ for comment on NGDP targeting. Basically, NGDP targeting beats inflation targeting when there are supply shocks, but RBNZ's inflation targeting lets them look through a lot of supply shocks already. And Sumner's noted that it works best in large diversified economies as well. Does New Zealand count?