Abstract:
Arguments for nominal income targeting are often dismissed 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 2–3 times smaller than other measures, it significantly improves real-time forecasts 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.
Citation:
Martinez, A.B., Schibuola, A.D. & Beckworth, D. (2025), 'The Reliability of the Nominal GDP Expectations Gap', Working Paper No. 2025-004, H.O. Stekler Research Program on Forecasting, George Washington University, Mercatus Center at George Mason University, https://www2.gwu.edu/~forcpgm/2025-004.pdf