The FOMC Decision: A NGDP Perspective
The idea behind the sticky forecast path for NGDP is twofold. First, the public makes many economic decisions based on a forecast of their nominal incomes. For example, households may take out a 30-year mortgage based on an implicit forecast of their nominal income over this horizon. The actual realization of nominal income may turn out to be very different than expected, but the households may not be able to quickly adjust their plans given sticky debt contracts and other commitments that constrain them. Therefore, the consequences of previous forecasts are often binding on them and slow to change even if their nominal income forecasts have been updated. Second, in addition to these old forecasts and decisions whose influence lingers, new forecasts and new decisions are being made each quarter for subsequent periods that will also have lingering effects. Together, this means future periods have many overlapping and different forecast applied to them that only gradually adjust.
Here are what the sticky forecast and actual NGDP paths looks like:
And here is the NGDP gap–the percent difference between the two series:
While the NGDP gap provides a nice cross check on the stance of monetary policy, it can also be used in an explicit monetary policy reaction function. Here is one I created:
Source: http://macromarketmusings.blogspot.com/2019/03/the-fomc-decision-ngdp-perspective.html
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