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The Stance of Monetary Policy: The NGDP Gap

Summary:
The Nominal Gross Domestic Product (NGDP) Gap is a benchmark measure created by the Mercatus Center to determine whether monetary policy is expansionary or contractionary. A neutral level of NGDP (the level at which NGDP growth is neither inflationary nor deflationary) is established by taking an average forecast of nominal income growth for a given quarter based off forecast for that period from the preceding 20 quarters. This forecast data is taken from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters. The NGDP gap measures the difference between this forecast and actual NGDP growth. If actual NGDP is below the neutral level, then monetary policy is contractionary. If actual NGDP is above the neutral level, then monetary policy is expansionary. [embedded

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The Nominal Gross Domestic Product (NGDP) Gap is a benchmark measure created by the Mercatus Center to determine whether monetary policy is expansionary or contractionary. A neutral level of NGDP (the level at which NGDP growth is neither inflationary nor deflationary) is established by taking an average forecast of nominal income growth for a given quarter based off forecast for that period from the preceding 20 quarters. This forecast data is taken from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters.

The NGDP gap measures the difference between this forecast and actual NGDP growth. If actual NGDP is below the neutral level, then monetary policy is contractionary. If actual NGDP is above the neutral level, then monetary policy is expansionary.

The rationale for this understanding is twofold. First, members of the public make many economic decisions on the basis of forecasts of their nominal incomes. For example, households may take out mortgages and car loans on the basis of forecasts of their nominal income. Similarly, firms may finance with debt and commit to multiyear contracts on plants, raw materials, and labor on the basis of forecasts of their nominal income. Second, the actual realization of nominal incomes may turn out to be very different from what is expected and, as a result, may be disruptive for households and firms that are not be able to quickly adjust their economic plans. These disruptions can be avoided by maintaining NGDP on the growth path expected by the public.

To ensure robustness, we have also created series using real-time measures of actual NGDP data, which was then revised. These series are called “Vintage NGDP Gaps.” This takes the initial-release NGDP data for each quarter to construct an NGDP gap. In other words, it shows the NGDP gap policymakers would have seen in real time given the initial NGDP data.

Each quarter, the Mercatus Center will update these series with the latest available data and provide a report for what this means for monetary policy.

For more information on how the NGDP Gap measures are constructed and how they may be used to understand policy, please see “The Stance of Monetary Policy: The NGDP Gap,” a policy brief by David Beckworth.

To download the data, click here.

To see the latest data, click here.

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