May 20, 2022

Measuring Monetary Policy: the NGDP Gap

 

The nominal gross domestic product (NGDP) gap is a benchmark measure created by the Mercatus Center at George Mason University to determine whether monetary policy is expansionary or contractionary.

Setting this benchmark requires establishing a neutral level of NGDP (the level at which NGDP is neither expansionary nor contractionary), which involves averaging the forecasts of nominal income for a given quarter from the preceding 20 quarters. These forecast data come from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters.

The NDGP gap measures the percentage difference between the neutral level of NGDP and the actual level of NGDP. 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 10th and 90th percentiles of the NGDP gap show whether the gap is significantly different than zero.

The figure above illustrates the NGDP gap from 1997 to the present. In the second quarter of 2000, the NGDP gap was 4.38 percent, which means that nominal income was 4.38 percent higher than expected and that monetary policy was effectively too easy. In the fourth quarter of 2008, the NGDP gap was −5.53 percent, which means that nominal income, was 5.53 percent less than the public expected it to be and that monetary policy was effectively too tight.

The NGDP gap is important for two reasons. First, people make many economic decisions on the basis of forecasts of their nominal incomes. Examples include households’ decisions to take out mortgages and car loans or firms’ decisions to finance with debt and commit to multiyear contracts on plants, raw materials, and labor. Second, actual nominal incomes may turn out very different from what people expect and, as a result, may be disruptive for households and firms that are not able to adjust their economic plans quickly. These disruptions can be avoided by maintaining NGDP on the growth path expected by the public.

Finally, I create a projection of the NGDP gap that can be seen in the figure below. To create this projection, I forecast the neutral and actual NGDP levels, along with their 10th and 90th percentiles, over the next 20 quarters. These forecasts use the monthly Blue Chip Economic Indicators, so it is possible to update the projection every month for the forecasted quarters.

Each quarter, the Mercatus Center will update the main NGDP gap series seen in the figures above, and each month it will update the projected NGDP gap seen in the second figure above. The Mercatus Center will also provide a quarterly report on these updated series and what they mean for the stance of 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.

Policy Briefs

These quarterly policy briefs track devlopments in the NGDP Gap.

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022