Can Monetary Stabilization Policy Be Improved by CPI Futures Targeting?

Scott Sumner (and similarly Kevin Dowd) proposes to have the central bank write futures contracts on the Consumer Price Index, and automatically adjust the money stock in response to the public's net position in such contracts, as a way of improving the precision and credibility of monetary policy. We identify two serious problems that can be expected to render Sumner's proposal ineffective: (1) the public has no incentive to take a speculative position in the contracts until it is too late to adjust the money stock, and (2) the central bank lacks an effective budget constraint