The Stance of Monetary Policy: The NGDP Gap

Abstract

One of the most important questions facing the Federal Reserve (Fed) is also one of the hardest for it to answer: What is the current stance of monetary policy? The answer to this question is straightforward in theory, but is quite challenging to apply in practice. Despite many valiant efforts by central bankers, academics, and market participants, there is still a lot of uncertainty in real time about whether monetary policy is too tight, too loose, or just about right. This policy brief attempts to add some clarity to this question by providing a new measure of the stance of monetary policy. This policy brief specifically shows how to construct a benchmark growth path for nominal GDP (NGDP) where monetary policy is neither expansionary nor contractionary. Deviations of actual NGDP from this neutral level of NGDP provide a way to assess the stance of monetary policy. These deviations, called the NGDP gap, can be used by the Federal Open Market Committee (FOMC) as a cross-check on existing indicators of the stance of monetary policy. This new measure will be available online and regularly updated by the monetary policy research program at the Mercatus Center. The website will provide both real-time vintage data and the latest current quarterly data. The calculations behind the new measures will also be made available.