The New York Fed DSGE Model Perspective on the Lagged Effect of Monetary Policy

Richard Crump, Marco Del Negro, Keshav Dogra, Pranay Gundam, Donggyu Lee, Ramya Nallamotu and Brian Pacula

No 20231121b, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: This post uses the New York Fed DSGE model to ask the question: What would have happened to interest rates, output, and inflation had the Federal Reserve been following an average inflation targeting (AIT)-type reaction function since 2021:Q2, when inflation began to rise—as opposed to keeping the federal funds rate at the zero lower bound (ZLB) until March 2022, and then raising it aggressively thereafter? We show that actual policy was more accommodative in 2021 than implied by the AIT reaction function and then more contractionary in 2022 and beyond. On net, the lagged effect of monetary policy on the level of GDP, when measured relative to the counterfactual, has been positive throughout the forecast horizon, due to the initial boost associated with keeping the fed funds rate near zero in 2021.

Keywords: Dynamic Stochastic General Equilibrium (DSGE) models; DSGE; lagged effects; forecasting; monetary policy; New York Fed (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Date: 2023-11-21
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-mon
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