The NGDP Moment

Includes: GREK
by: Scott Sumner

Back in 2008 you rarely heard economists talk about nominal GDP. Now it's the hot new idea in monetary policy targeting. But that's not all, we are also seeing more interest in nominal GDP-linked assets. Most famously, Robert Shiller has proposed "trills," which would be assets with a value linked to one trillionth of nominal GDP. They could be used to hedge against aggregate nominal income risk.

I've proposed nominal GDP futures markets, which are probably more accurately termed "prediction markets." And now we have the new Greek government talking about NGDP-linked government debt:

Greece's radical new government unveiled proposals on Monday for ending the confrontation with its creditors by swapping outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting wealthy tax-evaders.

Yanis Varoufakis, the new finance minister, outlined the plan in the wake of a dramatic week in which the government's first moves rattled its eurozone partners and rekindled fears about the country's chances of staying in the currency union.

After meeting Mr. Varoufakis in London, George Osborne, the UK chancellor of the exchequer, described the stand-off between Greece and the eurozone as the "greatest risk to the global economy".

Attempting to sound an emollient note, Mr. Varoufakis told the Financial Times the government would no longer call for a headline write-off of Greece's €315bn foreign debt. Rather it would request a "menu of debt swaps" to ease the burden, including two types of new bonds.

The first type, indexed to nominal economic growth, would replace European rescue loans, and the second, which he termed "perpetual bonds", would replace European Central Bank-owned Greek bonds.

"What I'll say to our partners is that we are putting together a combination of a primary budget surplus and a reform agenda," Mr. Varoufakis, a leftwing academic economist and prolific blogger, said.

A former blogger becomes a finance minister and proposes NGDP-linked bonds. What a crazy world we live in!

PS. I have a post on Greece over at Econlog