Econometric models and the monetary policy process

Abstract Econometric models play an important role in the monetary policy process of the Federal Reserve Board. Large-scale macroeconometric models are employed for forecasting, policy simulations, and the evaluation of monetary policy rules. However, in this work, we employ a mix of the algorithmic application of these models and judgment guided by information not available to models. We describe this approach and present an assessment of its strengths and weaknesses. The experience of the 1990–1991 recession and the subsequent recovery is used to illustrate some of the practical difficulties surrounding the use of econometric models for policy analysis.

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