The Reliability of the Nominal GDP Expectations Gap

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.  

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