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?

Welcome Kirdan

The excellent Kirdan Lees has a post on Labour's proposed monetary policy up at TVHE. I don't know for sure, but since he posted under the byline "Kirdan" rather than "The Hand", (the catch-all for guest posts at TVHE), I am assuming he has joined the TVHE team. If so, that is great news.

Mostly, Kirdan is spot on with his post. But blogging is boring if it becomes an echo chamber, and I disagree with one aspect of his post, which is summarised by his statements that "Getting kiwis to save more is probably a good thing", and "compulsory Kiwisaver probably pushes in the right direction".

Here is my comment on the post at TVHE

Kirdan, I am puzzled by your statement that making kiwisaver compulsory pushes in the right direction, and that encouraging New Zealanders to save more is probably a good thing. Saving means forgoing one good thing (consumption today) in order to get a different good thing (consumption tomorrow for yourself or your heirs). What is the welfare framework for thinking that people are making the wrong decision on that margin? Note that Investment is an intermediate good into the production of future output. If we did proper intertemporal accounting of GDP we would consider future discounted consumption as part of GDP, but deduct Investment spending as an intermediate good. Having one-period measures of GDP means that we double count investment twice: I is included in current GDP and future C is included in future GDP, but mis-measurement is not a reason to favour one consumption path over another.

And here is Kirdan's reply.

On balance I have enough sympathy with macroeconomic balance models – which show lower real interest rates and exchange rates from a better savings-investment balance – to favour promoting savings a bit more.
I used the phrase “probably pushes in the right direction” since most microeconomic studies suggest sufficient savings while the macro evidence suggests New Zealanders have a way to go.
Both the micro studies and the macro data are pretty fraught though. The revisions to GDP and the savings track in the UK show just how fragile the conclusions economists draw in this space can be.
The Treasury, the Reserve Bank and the IMF all suggest the exchange rate is 5-15 percent “overvalued” and point to savings being an issue. So some savings imbalance seems a reasonable problem definition for the Labour Party to start from.
I don't see GDP as the discounted sum of current and future consumption.

I'm afraid this still doesn't do it for me. Let me note that I can see all sorts of reasons based on market failures, externalities, paternalism, or intergenerational equity why one might reach the policy conclusion that the market is delivering too much current consumption. My problem with much of the policy debate is that these underlying values are never made explicit. As Matt at TVHE would say, we need to discuss trade-offs. Yes, Treasury, Reserve Bank, and the IMF: I am looking at you.

It is hard to make every part of one's analysis explicit in a blog post, and even harder in a reply to a comment, but I want to push Kirdan to provide a bit more.

First of all, what is a macroeconomic "imbalance"? I know we hear that term all the time, but I don't understand it. Countries don't borrow and lend, individual people, firms, and governments do for their own reasons. The sum of all borrowings less the sum of all lendings, may not necessarily equal zero at any time, but it is exactly balanced (by the laws of arithmetic), but the sum of all overseas lendings less the sum of all overseas borrowings, and is equally balanced by the difference between the sum of all NZ individual decisions to import less the sum of their decisions to export.

Second, why does the fact that models show lower real interest rates and exchange rates from higher savings (or lower investment?) imply that one should favour promoting savings. Those of us who are net savers and net importers beg to differ!

Finally, no, GDP is not the discounted sum of current and future consumption. It is what it is, and shouldn't be blamed for not measuring what it doesn't try to measure. But the discounted sum of current and future consumption is a better welfare measure than the discounted sum of current and future GDP. Focusing on the latter would lead one to see favouring savings as a way to increase welfare, but without articulating a reason for believing that the current decisions about consumption versus saving are inappropriate in some way, it does seem to be begging the question.