Contract Specifications for NGDP Futures

I know, this is beating an issue into the ground.
Here is something I’ve put together on the contract specs for NGDP futures. It’s clear I am not a fan of NGDP futures, but Scott Sumner complained I didn’t bother reading his papers on NGDP futures.
He’s right. I did not spend the money to go and read these papers. I relied on information from his blog to piece together his vision of NGDP futures. In particular, I relied on a post from May of 2009 to get his basic picture of NGDP futures.
Here are what I assume would be his contract specifications for NGDP futures, based on my reading of the May 2009 post.
This post is mostly a holder of information so we know the specs for these futures.
Contract Specifications:
Settlement Value: Bureau of Economic Analysis NGDP Table 3 times 1/1,000,000,000,000, rounded to the nearest .01  (This contract size is far too low)
Price Quote: Dollars and cents to hundredths of a cent. Example Value: 15,585.6 (from BEA Table 3 Line 1) * 1,000,000,000 = 15,585,600,000,000/1,000,000,000,000 = $15.5856
Tick Size (Minimum Fluctuation): 1/10,000 (one ten thousandth) of a dollar.
Tick Value: $.0001
Contract Months: The first 12 contract months in the quarterly January, April, July, October cycle. Three years of quarterly NGDP futures contracts.

Last Trading Day: Release date of Preliminary last Quarter GDP Report. Trading in expiring contract closes at 7:29am Central Time on the last trading day.
 Special Rules:
Margin: 10% of full contract value (Instead of normal futures margin calculations)
Margin Interest Rate: To be set by U.S. Federal Reserve at a rate high enough to insure sufficient liquidity
Market Maker: U.S. Federal Reserve
Contract Price: Two possibilities
  1. Set by U.S. Federal Reserve on a 5% p.a NGDP per capita growth path. Contract cannot trade at any other price as U.S. federal reserve promises to buy unlimited quantities of contract at this price.
  2. (This was by Bill Woosley in the comments section at MR and not Scott S in his post) Set by U.S. Federal Reserve on a 5% p.a NGDP per capita growth path until 9 months before contract expiration. Contract cannot trade at any other price as U.S. federal reserve promises to buy unlimited quantities of contract at this price. When expiration is closer than 9 months, contract is allowed to float in price, and fed no longer counts this open interest to the net open interest for the related open market operations.
Open Market Operations: Federal Reserve performs open market operations based on net open interest across all active contracts long/short at a 5:1 ratio. Example: Net futures position held by public is short $500m notional value of NGDP futures, so U.S. Fed purchases $2.5bn of T-Bills in response.


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3 years 10 months ago

The unemployment rate is, by far, the better dashboard gauge to adjust policy (like James Meade said, float payroll tax rate inversely to unemployment rate). GDP is too fuzzy and its lead time is too long.

The U3 unemployment rate reported on the first Friday after every month with BLS making revisions once a year (for trailing 5 years). GDP is also reported 12 times a year, its quarterly (NOT monthly) numbers are reported 3 times each ,not counting BEA’s annual revisions.
–First (Advance) Report, issued a month after the end of the target quarter
–Second (Preliminary) Report, issued two months after quarter
–Third (Final) Report, issued three months (an entire quarter!) after quarter. A few days after this, BLS would be releasing its THIRD monthly U3 update for the quarter after the target quarter.

The numbers do jump around. For example in 2Q12, Advance Report says 1.5% growth, Preliminary Report says 1.7%, Final Report says 1.3% growth. Woul you have a GDP futures market for each Report or would Cullen and I have to go offshore to set up markets for the other two Reports? :o)

3 years 10 months ago

Just to clarify my last point, I was teasing about going offshore with Cullen to set up our own NGDP futures market; that would be like drummer and the guitarist for The Police deciding that Sting was dead weight and had to go.
Mike’s has been a Chicago trader for years and knows more about the futures market than anyone you’ve ever met, read or heard of. Relevant to this discussion, he’s even invented and patented a unique futures product before.

I was piling on with the problems with using GDP, but that was putting the cart before the horse. If Mike is stumped with how to set up a functioning NGDP market, its reasonable to conclude its just not possible to set up a functioning NGDP market. To paraphrase the Zero Dark 30 trailer, there is no secret team on another floor with all the answers, its just Mike. :o)

3 years 10 months ago


Since you see problems with NGDP futures, can you think of way to design and implement them that would over come these problems?