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Working Paper
Two practical algorithms for solving rational expectations models
This paper describes the E-Newton and E-QNewton algorithms for solving rational expectations (RE) models. Both algorithms treat a model's RE terms as exogenous variables whose values are iteratively updated until they (hopefully) satisfy the RE requirement. In E-Newton, the updates are based on Newton's method; E-QNewton uses an efficient form of Broyden's quasi-Newton method. The paper shows that the algorithms are reliable, fast enough for practical use on a mid-range PC, and simple enough that their implementation does not require highly specialized software. The evaluation of the ...
Working Paper
Interest rate policies for price stability
Working Paper
What's happened to the Phillips curve?
The simultaneous occurrence in the second half of the 1990s of low and falling price inflation and low unemployment appears to be at odds with the properties of a standard Phillips curve. We find this result in a model in which inflation depends on the unemployment rate, past inflation, and conventional measures of price supply shocks. We show that, in such a model, long lags of past inflation are preferred to short lags, and that with long lags, the NAIRU is estimated precisely but is unstable in the 1990s. Two alternative modifications to the standard Phillips curve restore stability. One ...
Working Paper
A guide to FRB/US: a macroeconomic model of the United States
FRB/US is a large-scale quarterly econometric model of the U.S. economy, developed to replace the MPS model. Most behavioral equations are based on specifications of optimizing behavior containing explicit expectations of firms, households, and financial markets. Although expectations are explicit, the empirical fits of the structural descriptions of macroeconomic behavior are comparable to those of reduced-form time series models. In most instances, tests do not reject overidentifying restrictions of rational expectations or the hypothesis of serially independent residuals. As modeled, ...
Working Paper
LINVER: The Linear Version of FRB/US
FRB/US, a large-scale, nonlinear macroeconomic model of the U.S., has been in use at the Federal Reserve Board for 25 years. For nearly as long, the FRB/US “project” has included a linear version of the model known as LINVER. A key reason that LINVER exists is the vast reduction in the computational costs that linearity confers when running experiments requiring large numbers of simulations under the assumption that expectations are model-consistent (MC). The public has been able to download FRB/US simulation code, documentation, and data from the Federal Reserve Board’s website since ...
Journal Article
The role of expectations in the FRB/US macroeconomic model
In the past year, the staff of the Board of Governors of the Federal Reserve System began using a new macroeconomic model of the U.S. economy referred to as the FRB/US model. This system of mathematical equations, describing interactions among economic measures such as inflation, interest rates, and gross domestic product, is one of the tools used in economic forecasting and the analysis of macroeconomic policy issues at the Board. The FRB/US model replaces the MPS model, which, with periodic revisions, had been used at the Federal Reserve Board since the early 1970s. A key feature of the new ...