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The Reliability of the Nominal GDP Expectations Gap

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  • Andrew B. Martinez
  • Alexander D. Schibuola
  • David Beckworth

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.

Suggested Citation

  • Andrew B. Martinez & Alexander D. Schibuola & David Beckworth, 2025. "The Reliability of the Nominal GDP Expectations Gap," Working Papers 2025-004, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting.
    • Handle: RePEc:gwc:wpaper:2025-004
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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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