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June 2010 Tealbook Book B Tables and Charts
Appendix A. Measures of the Equilibrium Real Rate
Measure | Description |
---|---|
Single-equation Model | The measure of the equilibrium real rate in the single-equation model is based on an estimated aggregate-demand relationship between the current value of the output gap and its lagged values as well as the lagged values of the real federal funds rate. |
Small Structural Model | The small-scale model of the economy consists of equations for six variables: the output gap, the equity premium, the federal budget surplus, the trend growth rate of output, the real bond yield, and the real federal funds rate. |
EDO Model | Estimates of the equilibrium real rate using EDO--an estimated dynamic-stochastic-general-equilibrium (DSGE) model of the U.S. economy--depend on data for major spending categories, price and wages, and the federal funds rate as well as the model's structure and estimate of the output gap. |
FRB/US Model | Estimates of the equilibrium real rate using FRB/US--the staff's large-scale econometric model of the U.S. economy--depend on a very broad array of economic factors, some of which take the form of projected values of the model's exogenous variables. |
Tealbook-consistent | Two measures are presented--based on the FRB/US and the EDO models. Both models are matched to the extended Tealbook forecast. Model simulations determine the value of the real federal funds rate that closes the output gap conditional on the extended baseline. |
TIPS-based Factor Model | Yields on TIPS (Treasury Inflation-Protected Securities) reflect investors' expectations of the future path of real interest rates. The TIPS-based measure of the equilibrium real rate is constructed using the seven-year-ahead instantaneous real forward rate derived from TIPS yields as of the Tealbook publication date. This forward rate is adjusted to remove estimates of the term and liquidity premiums based on a three-factor arbitrage-free term-structure model applied to TIPS yields, nominal yields, and inflation. |
Proxy used for expected inflation | Actual real federal funds rate (current value) |
Tealbook-consistent FRB/US-based measure of the equilibrium real funds rate (current value) |
Average actual real funds rate (twelve-quarter average) |
---|---|---|---|
Lagged core inflation | -1.0 | -1.8 | -0.5 |
Lagged headline inflation | -1.5 | -1.9 | -0.6 |
Projected headline inflation | -1.0 | -1.9 | -0.7 |
Last update: January 29, 2016