Documentation of the Estimated, Dynamic, Optimization- Based (EDO) Model of the U.S. Economy

Chung, Hess; Kiley, Michael T.; Laforte, Jean-Philippe

doi:10.17016/feds.2010.29

Cited by 24 publications

(20 citation statements)

References 15 publications

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“…8. Examples of such models in use at central banks include the EDO and SIGMA models at the Federal Reserve Board (Chung, Kiley, and Laforte 2010;Erceg, Guerrieri, and Gust 2005) and the New Area-Wide Model at the European Central Bank (Christoffel, Coenen, and Warne 2008). 9.…”

Section: Percentmentioning

confidence: 99%

Monetary Policy in a Low Interest Rate World

Kiley¹,

Roberts²

2017

Brookings Papers on Economic Activity

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Nominal interest rates may remain substantially below the averages of the last half century, because central banks' inflation objectives lie below the average level of inflation, and estimates of the real interest rate that are likely to prevail over the long run fall notably short of the average real interest rate experienced during this period. Persistently low nominal interest rates may lead to more frequent and costly episodes at the effective lower bound (ELB) on nominal interest rates. We revisit the frequency and potential costs of such episodes in a world of low interest rates, using both a dynamic stochastic general equilibrium (DSGE) model and the Federal Reserve's largescale econometric model, the FRB/US model. Four main conclusions emerge. First, monetary policy strategies based on traditional, simple policy rules lead to poor economic performance when the equilibrium interest rate is low, with economic activity and inflation more volatile and systematically falling short of desirable levels. Moreover, the frequency and length of ELB episodes under such policy approaches are estimated to be significantly higher than in previous studies. Second, a risk adjustment to a simple rule-whereby monetary policymakers are more accommodative, on average, than prescribed by the rule-ensures that inflation averages its 2 percent objective, and requires that policymakers systematically seek inflation near 3 percent when the ELB is not binding. Third, commitment strategies, whereby monetary accommodation is not removed until either inflation or economic activity overshoots its longrun objective, are very effective in both the DSGE and FRB/US models. And

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Section: Percentmentioning

confidence: 99%

Monetary Policy in a Low Interest Rate World

Kiley¹,

Roberts²

2017

Brookings Papers on Economic Activity

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169

168

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“…For reviews of the various DSGE models employed by central banks, see Smets and Wouters (2003) for the euro area; Edge et al (2008) and Chung et al (2010) for the United States; and Dorich et al (2013) for Canada).…”

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confidence: 99%

Asset Prices and Macroeconomic Outcomes: A Survey

Claessens

Köse

2017

SSRN Journal

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BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org).

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“…However, in this setup, the value assigned to the inflation target parameter is simply a number that allows the model to generate the risky steady state of inflation so that it is consistent with the central bank's inflation objective, and does not have any structural interpretation. System for various policy analyses, the inflation target parameter in the policy rule is set to 2 percent, the Federal Reserve's target rate of inflation, to allow for a simple interpretation of the inflation target parameter (Chung, Kiley, and Laforte, 2010). 29 Similarly, in the New Area-Wide Model of the Euro Area, the DSGE model used for policy analyses at the European Central Bank, the inflation target parameter is interpreted as the monetary authority's long-run inflation objective and is set to 1.9 percent, which is "consistent with the ECB's quantitative definition of price stability of inflation below, but close to 2 percent" (Christoffel, Coenen, and Warne, 2008).…”

Section: 26mentioning

confidence: 99%

“…Chung, Kiley, and Laforte (2010) explain their calibration choice by saying, "some important determinants of steady-state behavior were calibrated to yield growth rates of GDP and associated price indexes that corresponded to "conventional" wisdom in policy circles, even though slight deviations from such values would have been preferred (in a "statistically significant" way) to our calibrated values. "30 These models are used for policy analyses in the context of the ELB on nominal interest rates (see, for instance, Chung, Laforte, Reifschneider, andWilliams (2012) andCoenen and Warne (2014)).…”

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confidence: 99%

Effective Lower Bound Risk

Hills

Nakata

Schmidt

2019

FEDS

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Even when the policy rate is currently not constrained by its effective lower bound (ELB), the possibility that the policy rate will become constrained in the future lowers today's inflation by creating tail risk in future inflation and thus reducing expected inflation. In an empirically rich model calibrated to match key features of the U.S. economy, we find that the tail risk induced by the ELB causes inflation to undershoot the target rate of 2 percent by as much as 50 basis points at the economy's risky steady state. Our model suggests that achieving the inflation target may be more difficult now than before the Great Recession, if the likely decline in long-run neutral rates has led households and firms to revise up their estimate of the frequency of future ELB events.

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Documentation of the Estimated, Dynamic, Optimization- Based (EDO) Model of the U.S. Economy

Cited by 24 publications

References 15 publications

Monetary Policy in a Low Interest Rate World

Monetary Policy in a Low Interest Rate World

Asset Prices and Macroeconomic Outcomes: A Survey

Effective Lower Bound Risk

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