A Guide to FRB/US : A Macroeconomic Model of the United States
Finance and Economics Discussion Series
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
... dentifying restrictions of rational expectations or the hypothesis of serially independent residuals. As modeled, private sector expectations of policy constitute a major transmission channel of monetary policy. Introduction and Overview FRB/US is a new quarterly econometric model of the U.S. economy developed to replace the MPS model. The new model has three distinctive features. First, the expectations of private sectors are explicit, and these expectations, especially market perceptions of policy, constitute a major transmission channel of monetary policy. Second, information assumed to be accessed by private sectors can vary in scope and timing, and can include "perfect foresight" or learning from past observations. Third, 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 contrast to the inability of MPS to disentangle forecast and response lags, the structure of FRB/US parses dynamics into contributions of expectations and adjustment frictions. This decomposition enables the new model to provide sharper interpretations of macroeconomic developments and to examine the sensitivity of forecasts and policy scenarios to a range of assumptions about how sectoral expectations are formed. However, the more explicit theoretical structure has been achieved while also incorporating newer statistical techniques aimed at improving the goodness of fit and reliability of empirical estimates. Despite changes in structure and updated empirical estimates, FRB/US retains several notable characteristics of MPS. One important similarity is the blend of long-run neoclassical conditions for equilibrium with short-run sticky-price disequilibria where monetary policy actions have significant short-run effects on the level of real activity. FRB/US is a large-scale model, containing some 300 equations and identities. However, the number of stochastic "core" equations or estimated descriptions of the economic behavior of firms, households, and investors is much smaller, around 50 equations. In the current edition of FRB/US (version 1.0), about half of these behavioral equations are based on formal specifications of optimizing behavior containing explicit estimates of the forward expectations of firms and households. Most of the discussion in this guide will focus on this subset of core equations because the format of these structural equations is new. Although the explicit expectations format may be extended to additional core equations in future model editions, most key macroeconomic relationships in version 1.0 of FRB/US now include explicit expectations. These include the estimated structural equations for aggregate consumption, two components of consumer durables, residential construction, investment in producers' durable equipment, inventory investment, labor hours, measures of aggregate price and labor cost, three long-term interest rates, and the value of corporate equity.