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Peter Gerdes's avatar

To be clear I'm arguing against Hanson's prediction markets and in FAVOR of NGDP targeting. The prediction markets would work fine in theory but only if the central bank was willing to really commit to absolutely following the rules and honoring arbitrarily large purchases of these predictive securities.

In this case we were talking about something like Hanson's proposal which I understood to be something like the central bank's choice of interest on reserves, value of purchases/sales by FOMC etc.. was set in an algorithmic way from the market value of certain instruments ISSUED BY THE GOVERNMENT which pay out in certain ways based on future events.

If the government retains the ability not to set their policy in the algorithmic fashion the prices of these securities dictate you lose many benefits. If not and the total value is limited you have a risk of large investors influencing future policy by manipulating the market.

Also, I worry is that in practice the government would only be willing to issue some very limited value of these special instruments and has a substantial chance of paying them off early based on some other formula when they are deemed to weird.

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ssumner2's avatar

Market manipulation doesn't seem to be a problem in other monetary regimes that peg a price, such a fixed exchange rates. In any case, under my "guardrails" approach the central bank would presumably ignore the attempt of one or two traders to manipulate the market

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