Thursday, April 13, 2017

Targeting NGDP in the sandbox

Let us take central bank NGDP targeting and place it, as is, in the sandbox; see how it works.

In particular, similar to Selgin, the S&L issuer agrees to some nominal coin losses. Stop for a moment and remember that at stable queues we expect the bounded variation and mean to have a fixed relationship, we are finite Poisson, however the mathematicians tell us to do that. So, if we want a 2% growth in issued coins (bit error losses), then at equilibrium, with slop, that cause  a 3% variation in flow through the S&L loan to deposits plus bit error. Bit error is inaccuracy by the pit boss in matching loans to deposits, it is shared, and small.

So most of that money growth gets priced as the known price variation, and becomes neutral.  The residual bit error volatility is the bit error inaccuracy, and remains.

In the sandbox, the central banker can do this all it wants. Currency insurance has to be a lot more accurage, and marked to market more frequently.   The central banker will be competing for market share,and the better it targets NGDP the more market share. But the sandbox supports central banks and NGDP targeting, lots of fun say the bots.

How does a central bank become a better NGDP targeter in the box?

Free entry and exit forces large government programs to bank with the bank.  With free entry, aggregate of secure elements can get on the entral bank S&L, no arbitrage built in to hold a safe rate.  All government programs want access to the even  money bet as to avoid  interest rate risk.

(Aside. Interest rate risk is defined in the sandbox. It means: Holding coins in the secure element and not on account. You miss the even money bet)

My method skips time

No time is bet.  The bets will pile in, loans to deposits trying to optiize the risk to maximize their payoff.  Firms have to bet 1) when the economy make 2% real growth and when does the firm make that growth The firm hedges the difference.  The term is estimated as the bets pile in (not stationary, remember) .  We get an economy that judges the sequence over which 2% growth is achieved.  Not a bad benchmark and likely a useful central bank.  But, for the senators, this means programs updates at asynchronous intervals, mostly when programs get out of balance with he 2% growth schedule.

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