Brilliant or Crazy? I Really Don't Know.
Apropos of Rafe’s last post on Complexity Economics, I ran across an economic stability proposal that is either brilliant or crazy. I both haven’t thought it over enough and am probably not qualified to determine which.
Scott Sumner is an unconventional monetary economist. His idea is for the Fed to sponsor a nominal GDP futures market. Then the Fed buys and sells unlimited quantities of futures at a price corresponding to a 4% nominal growth rate. The abstract for his most recent formal paper defending the policy is here.
I believe the idea is that a combination of anchored expectation, prediction market, and market arbitrage effects will serve to make this a self-fulfilling prophecy. The money supply and composition thereof will adaptively adjust to whatever level is necessary to achieve a 4% nominal growth rate given the aggregate knowledge of all market participants about fine grained aspects of the economy.
Inflation, of course, will float in such a way that real GDP will still fluctuate. But due to various forms of price and wage stickiness, keeping nominal output growth stable will serve to modestly dampen business cycles. More importantly, it will prevent the Fed from exerting inflationary or contractionary pressure on the economy by misjudging the proper level of the money supply. The market will always be able to arbitrage what it sees as mistakes.
Think of this as crowdsourcing monetary policy.