Current Forecasts From The Dynamic Stochastic General Equilibrium Model, And The Driving Forces

Fifth in a five-part series. This series examines the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (FRBNY DSGE) model—a structural model used by Bank researchers to understand the workings of the U.S. economy and provide economic forecasts.The U.S. economy has been in a gradual but slow recovery. Will the future be more of the same? This post presents the current forecasts from the Federal Reserve Bank of New York’s (FRBNY) DSGE model, described in our earlier “Bird’s Eye View” post, and discusses the driving forces behind the forecasts. Find the code used for estimating the model and producing all the charts in this blog series here. (We should reiterate that these are not the official New York Fed staff forecasts, but only an input to the overall forecasting process at the Bank.)

The model predicts that economic growth will continue to be sluggish as the headwinds from the financial crisis dissipate at a very slow pace. In addition, the negative shocks that have buffeted the economy will continue to restrain investment spending and further slow the recovery. These negative shocks have been offset in the past by expansionary monetary policy, but the positive effects of this policy are set to fade. Because of the still relatively weak economy, inflation remains below the Fed’s long-term objective, with the gap between inflation and the objective closing over the forecast horizon.

The chart below presents quarterly forecasts for real output growth and the core personal consumption expenditures PCE inflation rate over the 2014-17 horizon. These forecasts were generated with data available at the end of July 2014. More specifically, we use data for real GDP growth, core PCE inflation, and the growth in total hours released through the second quarter of 2014, as well as values for the federal funds rate and the spread between BAA corporate bonds and ten-year Treasury yields up to July 30, 2014. The black line represents released data, the red line is the forecast, and the shaded areas mark the uncertainty associated with our forecasts at 50, 60, 70, 80, and 90 percent probability intervals. Notice that the uncertainty around the forecast is minimal for the third quarter of 2014, partly because some of the data used are available for that period of time. Output growth and inflation are expressed in quarter-to-quarter percentage annualized rates.

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