Bailouts: I’m not sure whether this is overstating the case. The central bank is the liquidity provider of last resort (and clearinghouse) in addition to being the monetary policy authority. Saving insolvent banks is not its job, but saving illiquid banks is.
Prediction markets: Let’s set up one to correctly debias a biased coin, and use binary options. If the market starts at 55:45, we add more weight to the tails side until the prices move to 50:50, and we get a fair coin. Let’s say that the market is funded with $10. Now I come along and for fun I promise to divide $5 between “tails” options. The market still comes back to equilibrium at 50:50, but the coin is weighted to have a 0.75 chance of coming up heads.
An actual proposal for automated NGDP targeting almost describes just such a scheme. On pages 20-21 the “market deepening” is a variant of this that is tailored to leave the price intact. Despite the different contract design, promising a biased payout is entirely possible. Furthermore, the proposed system has bugs that would cause problems, even apart from any securities vulnerability (pun intended).
- While risk premium is dissected and shown not to be a concern, liquidity premium is. If NGDP futures become more liquid, they will become more attractive investments at the same pecuniary yield, more will be bought and cause some deflation. If the system is set up with a high gain (e.g. every $1 of NGDP bought, $1000 in reserves is removed and $1000 worth of T-securities is introduced into circulation), then this may or may not alter the total supply of liquidity sufficiently to increase demand for NGDP by $1.
- To the extent real interest rates and RGDP growth can vary from each other, if e.g. the first drops more than the latter, then the present value of NGDP contracts goes up (because the future payout is discounted less steeply), and monetary policy contracts.
P.s. about manipulation: even if I manipulate for profit, I never trade in NGDP futures themselves. I get a position in dollar cash (or T-securities) and make a promise to pay those who trade in NGDP. The latter moves their expected price directly, and arbitrageurs move the spot price afterwards, implementing monetary policy as a side effect. This is analogous to the “light a candle under the thermostat” fable.
Bailouts: I’m not sure whether this is overstating the case. The central bank is the liquidity provider of last resort (and clearinghouse) in addition to being the monetary policy authority. Saving insolvent banks is not its job, but saving illiquid banks is.
Prediction markets: Let’s set up one to correctly debias a biased coin, and use binary options. If the market starts at 55:45, we add more weight to the tails side until the prices move to 50:50, and we get a fair coin. Let’s say that the market is funded with $10. Now I come along and for fun I promise to divide $5 between “tails” options. The market still comes back to equilibrium at 50:50, but the coin is weighted to have a 0.75 chance of coming up heads.
An actual proposal for automated NGDP targeting almost describes just such a scheme. On pages 20-21 the “market deepening” is a variant of this that is tailored to leave the price intact. Despite the different contract design, promising a biased payout is entirely possible. Furthermore, the proposed system has bugs that would cause problems, even apart from any securities vulnerability (pun intended).
- While risk premium is dissected and shown not to be a concern, liquidity premium is. If NGDP futures become more liquid, they will become more attractive investments at the same pecuniary yield, more will be bought and cause some deflation. If the system is set up with a high gain (e.g. every $1 of NGDP bought, $1000 in reserves is removed and $1000 worth of T-securities is introduced into circulation), then this may or may not alter the total supply of liquidity sufficiently to increase demand for NGDP by $1.
- To the extent real interest rates and RGDP growth can vary from each other, if e.g. the first drops more than the latter, then the present value of NGDP contracts goes up (because the future payout is discounted less steeply), and monetary policy contracts.
P.s. about manipulation: even if I manipulate for profit, I never trade in NGDP futures themselves. I get a position in dollar cash (or T-securities) and make a promise to pay those who trade in NGDP. The latter moves their expected price directly, and arbitrageurs move the spot price afterwards, implementing monetary policy as a side effect. This is analogous to the “light a candle under the thermostat” fable.