The evolution of macro models at the Federal Reserve Board

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Abstract

Large-scale macroeconomic models have been used at the Federal Reserve Board for nearly 30 years. After briefly reviewing the first generation of Fed models, which were based on the IS/LM/Phillips curve paradigm, the paper describes the structure and properties of a new set of models. The new models are more explicit in their treatment of expectations formation and household and firm intertemporal decision-making. The incorporation of more rigorous theoretical microfoundations is accomplished while maintaining a high standard of goodness of fit. Simulations illustrate the effects of alternative assumptions about the formation of expectations and policy credibility on system properties.

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    The authors gratefully acknowledge the comments of Robert King and Ben McCallum and participants at the conference. The macroeconomic models at the Federal Reserve Board described in this paper represent the work of many individuals at the Fed. Brayton and Williams participated in the project to build the FRB/US model, along with other members of the Macroeconomic and Quantitative Studies section in the Division of Research and Statistics. They would like to acknowledge the valuable assistance of Steve Summer in preparing this paper. The foreign blocks of FRB/Global were developed in the Trade and Financial Studies section of the Division of International Finance. Levin and Tryon acknowledge valuable discussions with David Bowman, Chris Erceg, Dale Henderson, and John Rogers, and the excellent research assistance of Asim Husain and Jon Otting. Views presented are those of the authors and do not necessarily represent those of the Federal Reserve Board.

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