Plenty of people have opinions about central bank and if they should raise or lower or hold interest rates. Prediction markets would be a great tool to turn this into a more data-driven decision making process. Here, I will demonstrate it in a naive way and you can participate.
My simple model: We want to raise interest rates to combat inflation. We want to lower interest rates to increase GDP (aka “the economy”). The goal is to find a balance. At certain meetings, we can make a decision to raise/lower/hold the interest rates.
Setup
Let’s do it for the European Central Bank (ECB). EU elections are next June, so that feels like a good target date. Looking at their calendar, the next three decision meetings are in December, January, and March. Here are three markets, what decisions they make:
Next, we need forecasts for GDB and inflation. Since the data comes in with a delay, I picked dates well before June.
The markets are just a baseline though. For decision making, we need conditional markets. There are three decisions with three options each. Nine scenarios would be too much though. Let’s simplify it to the question if they raise in any meeting.
The Billion-Euro question is the difference between the conditional and unconditional markets. That is the forecast about the impact of a “raise” decision. With a popular prediction market, it is the best data for a decision you can get.
Unfortunately, there seems to be little interest, so we don’t have good data. Lagarde says sustaining ECB rate at 4% should help on prices. The conditional markets above will probably resolve NA and everybody gets their money back. 😔
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Not much more interest in the US either
Here is a similar market for the Fed. In general, there are more forecasters from the US, but in this case it does not translate into much more interest.
Apparently, the forecasting community needs to grow further before we can answer complicated questions like these.
My last post did not age well. The situation around Sam Altman and OpenAI rapidly changed. This Manifold page updates quite well and presents the current questions. Zvi wrote a good summary of the events.
Probably until next week, interested readers! 😊