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December 2011 Tealbook B Tables and Charts


Explanatory Notes

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, prices 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 exogenous variables in the extended baseline forecast.
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)
Projected real
funds rate
(twelve-quarter-
ahead average)
Lagged core inflation -1.5 -3.3 -1.4
Lagged headline inflation -2.7 -3.4 -1.4
Projected headline inflation -1.2 -3.2 -1.2

B. Analysis of Policy Paths and Confidence Intervals

Rule Specifications

For the following rules, $$ i_t$$ denotes the federal funds rate for quarter $$ t$$, while the right-hand-side variables include the staff's projection of trailing four-quarter core PCE inflation ($$ \pi_t$$), the forecast of inflation two and three quarters ahead ($$ \pi_{t+2|t}$$ and $$ \pi_{t+3|t}$$), the output gap estimate for the current period as well as its one quarter ahead forecast ($$ y_t-y_t^*$$ and $$ y_{t+1|t}-y_{t+1|t}^*$$), and the forecast of three-quarter-ahead annual average GDP growth relative to potential ($$ \Delta^4y_{t+3|t}-\Delta^4y_{t+3|t}^*$$). The assumed value of policymakers' long-run inflation objective is denoted $$ \pi^*$$. The outcome-based and forecast-based rules were estimated using real-time data over the sample 1988:1-2006:4; each specification was chosen using the Bayesian information criterion. Each rule incorporates a 75 basis point shift in the intercept, specified as a sequence of 25 basis point increments during the first three quarters of 1998. The first two simple rules were proposed by Taylor (1993, 1999). The prescriptions of the first-difference rule do not depend on assumptions regarding $$ r^*$$ or the level of the output gap; see Orphanides (2003).

Rule Specification
Outcome-based rule $$ i_t = 1.20i_{t-1}-0.39i_{t-2}+0.19[1.17+1.73\pi_t+3.66(y_t-y_t^*)-2.72(y_{t-1}-y_{t-1}^*)]$$
Forecast-based rule $$ i_t = 1.18i_{t-1}-0.38i_{t-2}+0.20[0.98+1.72\pi_{t+2|t}+2.29(y_{t+1|t}-y_{t+1|t}^*)-1.37(y_{t-1}-y_{t-1}^*)]$$
Taylor (1993) rule $$ i_t = 2+\pi_t+0.5(\pi_t-\pi^*)+0.5(y_t-y_t^*)$$
Taylor (1999) rule $$ i_t = 2+\pi_t+0.5(\pi_t-\pi^*)+(y_t-y_t^*)$$
First-difference rule $$ i_t = i_{t-1}+0.5(\pi_{t+3|t}-\pi^*)+0.5(\Delta^{4} y_{t+3|t} - \Delta^{4} y_{t+3|t}^*)$$

C. Long-Run Projections of the Balance Sheet and Monetary Base

Federal Reserve Balance Sheet: End-of-Year Projections -- Alternative A
Billions of dollars
Nov 30, 2011 2012 2014 2016 2018 2020
Total assets 2,817 3,252 3,158 2,240 1,793 2,002
Selected assets
Liquidity programs for financial firms 3 0 0 0 0 0
Primary, secondary, and seasonal credit 0 0 0 0 0 0
Central bank liquidity swaps 2 0 0 0 0 0
Lending through other credit facilities 10 4 0 0 0 0
Term Asset-Backed Securities Loan Facility (TALF) 10 4 0 0 0 0
Support for specific institutions 38 29 21 11 7 4
Credit extended to AIG 0 0 0 0 0 0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
38 29 21 11 7 4
Securities held outright 2,605 3,030 2,979 2,098 1,674 1,896
U.S. Treasury securities 1,672 1,662 1,611 1,238 1,347 1,896
Agency debt securities 106 77 39 16 2 0
Agency mortgage-backed securities 827 1,291 1,330 843 324 0
Net portfolio holdings of TALF LLC 1 1 1 0 0 0
Total other assets 161 188 157 130 112 103
Total liabilities 2,763 3,182 3,066 2,117 1,630 1,788
Selected liabilities
Federal Reserve notes in circulation 1,020 1,090 1,217 1,365 1,515 1,673
Reverse repurchase agreements 93 70 70 70 70 70
Deposits with Federal Reserve Banks 1,578 2,006 1,762 666 30 30
Reserve balances held by depository institutions 1,492 1,988 1,757 661 25 25
U.S. Treasury, General Account 86 17 5 5 5 5
U.S. Treasury, Supplementary Financing Account 0 0 0 0 0 0
Other balances 0 0 0 0 0 0
Interest of Federal Reserve Notes due to U.S. Treasury 1 0 0 0 0 0
Total capital 54 70 93 123 162 215

Source: Federal Reserve H.4.1 statistical releases and staff calculations.

Note: Components may not sum to totals due to rounding.


Federal Reserve Balance Sheet: End-of-Year Projections -- Alternative B
Billions of dollars
Nov 30, 2011 2012 2014 2016 2018 2020
Total assets 2,817 2,828 2,680 1,934 1,793 2,002
Selected assets
Liquidity programs for financial firms 3 0 0 0 0 0
Primary, secondary, and seasonal credit 0 0 0 0 0 0
Central bank liquidity swaps 2 0 0 0 0 0
Lending through other credit facilities 10 4 0 0 0 0
Term Asset-Backed Securities Loan Facility (TALF) 10 4 0 0 0 0
Support for specific institutions 38 29 21 11 7 4
Credit extended to AIG 0 0 0 0 0 0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
38 29 21 11 7 4
Securities held outright 2,605 2,610 2,504 1,795 1,675 1,897
U.S. Treasury securities 1,672 1,662 1,611 1,238 1,465 1,897
Agency debt securities 106 77 39 16 2 0
Agency mortgage-backed securities 827 871 855 540 208 0
Net portfolio holdings of TALF LLC 1 1 1 0 0 0
Total other assets 161 185 154 128 110 101
Total liabilities 2,763 2,758 2,587 1,811 1,630 1,788
Selected liabilities
Federal Reserve notes in circulation 1,020 1,090 1,217 1,365 1,515 1,673
Reverse repurchase agreements 93 70 70 70 70 70
Deposits with Federal Reserve Banks 1,578 1,582 1,284 361 30 30
Reserve balances held by depository institutions 1,492 1,564 1,279 356 25 25
U.S. Treasury, General Account 86 17 5 5 5 5
U.S. Treasury, Supplementary Financing Account 0 0 0 0 0 0
Other balances 0 0 0 0 0 0
Interest of Federal Reserve Notes due to U.S. Treasury 1 0 0 0 0 0
Total capital 54 70 93 123 162 215

Source: Federal Reserve H.4.1 statistical releases and staff calculations.

Note: Components may not sum to totals due to rounding.


Federal Reserve Balance Sheet: End-of-Year Projections -- Alternative C
Billions of dollars
Nov 30, 2011 2012 2014 2016 2018 2020
Total assets 2,817 2,662 2,038 1,603 1,793 2,002
Selected assets
Liquidity programs for financial firms 3 0 0 0 0 0
Primary, secondary, and seasonal credit 0 0 0 0 0 0
Central bank liquidity swaps 2 0 0 0 0 0
Lending through other credit facilities 10 4 0 0 0 0
Term Asset-Backed Securities Loan Facility (TALF) 10 4 0 0 0 0
Support for specific institutions 38 29 16 11 7 4
Credit extended to AIG 0 0 0 0 0 0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
38 29 16 11 7 4
Securities held outright 2,605 2,469 1,890 1,482 1,689 1,908
U.S. Treasury securities 1,672 1,598 1,338 1,246 1,689 1,908
Agency debt securities 106 77 39 16 0 0
Agency mortgage-backed securities 827 794 513 220 0 0
Net portfolio holdings of TALF LLC 1 1 1 0 0 0
Total other assets 161 159 131 110 97 90
Total liabilities 2,763 2,592 1,945 1,481 1,630 1,788
Selected liabilities
Federal Reserve notes in circulation 1,020 1,090 1,217 1,365 1,515 1,673
Reverse repurchase agreements 93 70 70 70 70 70
Deposits with Federal Reserve Banks 1,578 1,416 642 30 30 30
Reserve balances held by depository institutions 1,492 1,398 637 25 25 25
U.S. Treasury, General Account 86 17 5 5 5 5
U.S. Treasury, Supplementary Financing Account 0 0 0 0 0 0
Other balances 0 0 0 0 0 0
Interest of Federal Reserve Notes due to U.S. Treasury 1 0 0 0 0 0
Total capital 54 70 93 123 162 215

Source: Federal Reserve H.4.1 statistical releases and staff calculations.

Note: Components may not sum to totals due to rounding.


Last update: February 3, 2017