Sunday, October 2, 2016

DSGE models by design love. CB "forward guidance "

",,,, use DSGE (dynamic stochastic general equilibrium) models to estimate the effects of forward guidance on macroeconomic variables 
such as GDP growth, 
core PCE inflation,
 the federal funds rate.

 A simulation  in which the FOMC committed to extending the “liftoff” date of the FFR for two quarters had “implausibly” large effects
 including a sharp spike in GDP growth over the next two years, !!!


" experimentation with a more realistic upper bound on the response of the long-term bond yield showed 

a policy-driven shift in in FFR market expectations 
would have sizable, though reasonable, effects on GDP growth 
but only a modest impact on inflation.” 

Yes the hand visible intervenes 

But listen children .....

"That the initial simulation drove such a large change in GDP remains “a forward guidance puzzle,”