Estimates of r* Consistent with a Supply-Side Structure and a Monetary Policy Rule for the U.S. Economy
We estimate the natural rate of interest (r*) using a semi-structural model of the U.S. economy that jointly characterizes the trend and cyclical factors of key macroeconomic variables such as output, the unemployment rate, inflation, and short- and long-term interest rates. We specify a monetary policy rule and an equation that characterizes the 10-year Treasury yield to exploit the information provided by both interest rates to infer r*. However, the use of a monetary policy rule with a sample that spans the Great Recession and its aftermath poses a challenge because of the effective lower ...
Real-time Historical Estimates of the Output Gap
The purpose of this note is to highlight the recent availability of an expanded set of historical data of the staff's estimates of the real-time output gap at the Real-Time Data Research Center of the Federal Reserve Bank of Philadelphia.
November 2014 Update of the FRB/US Model
This FEDS Note is a companion to the most recent release of the FRB/US model of the U.S. economy available at http://www.federalreserve.gov/econresdata/frbus/us-models-about.htm. The purpose of this note is twofold. First, it briefly outlines and describes the changes to the structure of the public version of FRB/US since its introduction in the spring of 2014. In addition, it compares the dynamics of the current version to that of the original version in response to key shocks.
Pricing models: a Bayesian DSGE approach to the U.S. economy
Have we underestimated the likelihood and severity of zero lower bound events?
Before the recent recession, the consensus among researchers was that the zero lower bound (ZLB) probably would not pose a significant problem for monetary policy as long as a central bank aimed for an inflation rate of about 2 percent; some have even argued that an appreciably lower target inflation rate would pose no problems. This paper reexamines this consensus in the wake of the financial crisis, which has seen policy rates at their effective lower bound for more than two years in the United States and Japan and near zero in many other countries. We conduct our analysis using a set of ...
Documentation of the Estimated, Dynamic, Optimization-based (EDO) model of the U.S. economy: 2010 version
This paper provides documentation for a large-scale estimated DSGE model of the U.S. economy--the Federal Reserve Board's Estimated, Dynamic, Optimization-based (FRB/EDO) model project. The model can be used to address a wide range of practical policy questions on a routine basis. The paper discusses the model's specification, estimated parameters, and key properties.
Estimating the macroeconomic effects of the Fed’s asset purchases
An analysis shows that the Federal Reserve?s large-scale asset purchases have been effective at reducing the economic costs of the zero lower bound on interest rates. Model simulations indicate that, by 2012, the past and projected expansion of the Fed?s securities holdings since late 2008 will lower the unemployment rate by 1 percentage points relative to what it would have been absent the purchases. The asset purchases also have probably prevented the U.S. economy from falling into deflation.
A comparison of forecast performance between Federal Reserve staff forecasts, simple reduced-form models, and a DSGE model
This paper considers the "real-time" forecast performance of the Federal Reserve staff, time-series models, and an estimated dynamic stochastic general equilibrium (DSGE) model--the Federal Reserve Board's new Estimated, Dynamic, Optimization-based (Edo) model. We evaluate forecast performance using out-of-sample predictions from 1996 through 2005, thereby examining over 70 forecasts presented to the Federal Open Market Committee (FOMC). Our analysis builds on previous real-time forecasting exercises along two dimensions. First, we consider time-series models, a structural DSGE model that ...
Natural rate measures in an estimated DSGE model of the U.S. economy
This paper presents a monetary DSGE model of the U.S. economy. The model captures the most important production, expenditure, and nominal-contracting decisions underlying economic data while remaining sufficiently small to allow it to provide a clear interpretation of the data. We emphasize the role of model-based analyses as vehicles for storytelling by providing several examples--based around the evolution of natural rates of production and interest--of how our model can provide narratives to explain recent macroeconomic fluctuations. The stories obtained from our model are both similar to ...