Extensions to the NGDP Gap
The monetary policy program at the Mercatus Center recently released a new measure called the NGDP gap . We created it as an alternative way to gauge the stance of monetary policy and have provided a website that will update the measure as new data become available. In this post, I will briefly summarize the NGDP Gap and then highlight a few extensions that some readers may find useful. Summary of the NGDP Gap As mentioned above, the NGDP Gap provides a cross check on the stance of monetary policy. Its use does not require the Fed to adopt a NGDP target, but it does draw upon the fact that NGDP is comprised of both real GDP and the price level and therefore captures both elements of the Fed’s dual mandate. Moreover, since NGDP is a nominal variable it can be shaped by the Fed over the medium to long run. The basic idea behind this measure is to construct a benchmark growth path for nominal GDP (NGDP) where monetary policy is neither expansionary ...