Prediction markets and UK monetary policy

I have long argued that central banks should utilise prediction markets for macroeconomic forecasting and for the implementation of monetary policy.

In today’s edition of the UK business daily City AM I have an oped on this topic and about how the Bank of England should have a closer look at prediction markets. See here:

IN HIS first major speech since becoming governor of the Bank of England, Mark Carney is today likely to defend a policy that has come to be described as the “Carney rule”. Also known as forward guidance, the rule effectively promises that interest rates will stay at present levels until unemployment drops below 7 per cent, so long as the Bank’s inflation forecast does not top 2.5 per cent.
This kind of forward guidance is welcome news for the financial markets. We will now at least have some sort of map to navigate monetary policy, instead of relying on insinuations from the lips of the wise men on the Monetary Policy Committee (MPC).
But this still leaves markets at the mercy of the Bank of England’s internal forecasters, whose credibility can certainly be questioned. The Bank doesn’t need to be biased to consistently predict that it will hit its inflation target, for example (though what institution would forecast that it will fail?). Even with the best incentives, it cannot possibly bring together all the private knowledge spread across investors, firms and households.
It is this inability of elite central planners to gather such a wide source of information that led even committed Marxist GA Cohen to agree that markets may be necessary for a rational economic system. No individual, however intelligent, can know enough about the economy to make a really reliable prediction about it.
And it’s not just the dragging-together of information from thousands of different sources that makes market predictions more accurate than those made by small elite groups. Investors betting in markets have skin in the game; they have an extremely strong incentive to get their bets right, since they will lose money for bad (inaccurate) bets and win money for good (accurate) ones.
Read the rest of the piece here.
And Mark Carney is lucky that he now in fact has a prediction market to look at. This is from a press release from the Adam Smith Institute:

Today we’ve launched two betting markets to try to use the ‘wisdom of crowds’ to beat government economic forecasters….The Bank of England’s economic forecasts have been wrong again and again. To counter this, the free market Adam Smith Institute is today (Wednesday 28th August) launching two betting markets where members of the public can bet on UK inflation and unemployment rates, taking the government’s experts on at their own game. The markets are designed to aggregate individual predictions about the economy’s prospects to use the ‘wisdom of crowds’ to beat the predictions of government experts.

The launch coincides with Mark Carney’s first major speech as governor of the Bank of England and follows his announcement earlier this month that the Bank will consider both inflation and unemployment when deciding monetary policy.
Read more here.
It will extremely interesting to follow how this prediction market will work and it will obviously be very interesting to see how it will impact the monetary policy debate in the UK. My hope certainly is that it will help the case for market-driven monetary policy implementation and also help “police” the Bank of England’s forecasts.

The Danish Centre for Military Studies on Syria

If I were to write a blog post on Syria I would write about the law of unintended consequences, but I am not going to do that. Instead have a look at this paper from the Danish Centre for Military Studies on “Syria’s Military Capabilities and Options for Military Intervention”.

Here is the abstract:

Centre for Military Studies presents this background paper on Syrian military capabilities, the implications for potential military intervention by other states, as well as scenarios for potential Danish military contributions.

The purpose of this paper is to briefly describe military capabilities and options in order to provide a factual background for the ongoing discussion on possible military intervention in the Syrian conflict and Denmark’s possible participation in such a conflict.

This background paper includes a short description of Syria, to set the grounds for understanding the population and military context. The paper argues that Syria is in many ways similar to Iraq and Libya, where the international community has intervened in various ways. To understand the Syrian military and its capabilities and what kind of military a possible intervention force might face, this paper summarizes its structure and capabilities, by taking a closer look at all three branches of the Syrian Military and paramilitary.

On the basis of this summary, the paper proposes two distinct scenarios for military intervention by state coalitions;

1. Operation Thunderstorm: Military intervention based on an intensive air campaign and the use of technologically superior air power, which will reduce the adversary factor to between 1:2 – 1:4,

2. Operation Dust Storm: Military intervention based on a two-step approach, this being a land and amphibious invasion with corps-level units sent from naval task forces and bases in Turkey, preceded by an intensive air campaign.

The paper concludes with a short summary of the possible options for Danish support from all three branches of the military.

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