New uses for new macro derivatives

Economic forecasters often look to the performance of futures markets to help predict such economic developments as movements in the price of oil and other commodities. In addition, relatively new financial market instruments, like TIPS, help policymakers get a handle on the public's inflation expectations. ; In the last few years, derivatives markets involving bets on future economic events have emerged. In October 2002, Goldman Sachs and Deutsche Bank joined forces to form a market in what they call "Economic Derivatives." More recently, other U.S.-based markets have been created for GDP and the international trade balance, and plans are underway for instruments on the U.S. CPI. ; This Economic Letter summarizes research by Gürkaynak and Wolfers (2005), which examines how these markets work and how useful they may be for economic predictions.