I'm not very good at this. But I think we need to ask the question. Others could answer it better than me.
Scott Sumner tells me that Greece is considering issuing NGDP-linked bonds, where the amount the government pays to bondholders is proportional to Nominal Gross Domestic Product. Like Scott, I rather like the idea of NGDP-linked bonds. But they do have one potential downside compared to regular bonds, and we need to think about it.
If a government issues NGDP-linked bonds, it has an incentive to lie about NGDP statistics. It has an incentive to say that NGDP is lower than it really is, or really could be. Because the lower is NGDP, the less money the government has to pay to those who hold NGDP-linked bonds.
It's a bit like (though not exactly like) the incentive an individual has to lie about his income, and say that his income is lower than it really is, so he pays less income tax.
[Update: maybe "manipulate" is a better word than "lie".]
I don't know how big a problem this would be for Greece, or any country. Maybe there are ways around it too, like external accountants.
But I'm going to try to think of cases where the exact definition or measurement of NGDP is a bit fuzzy, where a determined government and compliant national statistics office could fudge the numbers:
1. Government expenditure vs transfer payments. Government expenditures on newly-produced goods and services are included in NGDP, but transfer payments (where the government is just handing out cash, and not buying anything) are not included. Hmmm. Suppose the government cut pay to the police by $100, but increased welfare payments for their kids by $100. NGDP falls by $100. (Somebody should to be able to cook up a better example, but you get the idea.)
2. Investment vs intermediate goods. Suppose firm A buys (say) software for $40 from firm B, and uses it to produce final goods worth $100. If you treat that software as an investment expenditure (because it's a long-lasting capital good) then NGDP is $40 + $100 = $140. But if you treat that software as expenditure on an intermediate good (because it gets used up in producing the final good) then the value added of firm A is $100 - $40 = $60, and the value added of firm B is $40, giving NGDP as $60 + $40 = $100 (the value of final goods and services produced). (If we were calculating Nominal Net Domestic Product we would subtract depreciation on the software from Nominal Gross Domestic Product, but depreciation is notoriously difficult to define and measure, which is why we usually talk about NGDP rather than NNDP.)
3. There's the whole underground economy thing, where the people producing the goods and services don't report them to the government (because they want to avoid taxes), and so the government doesn't report it in NGDP. The government still has an incentive to go after the underground economy to get extra tax revenue, but it has less of an incentive if it has NGDP-linked bonds, because some of that extra tax revenue will go to the bondholders.
4. What else?
How big a problem is this? Can it be fixed?
(I don't think this is as big a problem for NGDP targeting, because I don't see as big an incentive for the government to lie.)
On the upside, maybe one of the most boring and arcane parts of teaching macro is going to get exciting and relevant!