The Reliability of the Nominal GDP Expectations Gap

Abstract:

Arguments for nominal income targeting are often dis missed because it is an unreliable measure. To assess these concerns, we compare the real-time performance of several nominal and real measures of economic slack. We find that the nominal GDP expectations gap—the difference between nominal GDP and average projections thereof from surveys of professional forecasters—performs well as a measure of economic slack: its historical revisions are two to three times smaller than other measures, it significantly improves real-time fore casts of inflation since the pandemic, and it makes monetary policy rules up to 40 percent less volatile. Overall, concerns about nominal income targets are misplaced.