Academic journal article Journal of Money, Credit & Banking

Computable General Equilibrium Models and Monetary Policy Advice

Academic journal article Journal of Money, Credit & Banking

Computable General Equilibrium Models and Monetary Policy Advice

Article excerpt

To a Fed ECONOMIST, the "Greenbook" and "Bluebook"-- that is, the briefing materials provided by the Board of Governors' staff of economists for each meeting of the Federal Open Market Committee (FOMC)--are among the raw materials of monetary policy advice. The independent research and modeling within the individual District banks notwithstanding, the analysis contained in each Greenbook and Bluebook constitutes the common focal point for FOMC-directed policy discussions throughout the Federal Reserve System.

Writing in the Autumn 1980 volume of the Carnegie-Rochester Conference Series on Public Policy, Raymond Lombra and Michael Moran provided the first widely available, documented glimpse of these most basic building blocks of U.S. monetary policy advice.(1) They explain that

[the Greenbook] lays out the assumptions underlying the [staff's economic] forecast,

particularly any changes in key assumptions ... ; sums up the net implication of data

received since the last meeting; lays out the revised forecast for GNP, inflation, and

unemployment; and explains any significant changes in the staff's economic outlook.

(p. 13)

Of the Bluebook they write:

The Bluebook . . . presents alternative short-run policy options for the

FOMC's consideration, develops the relationship between each alternative and

the longer-run monetary targets, and discusses the implications of each

alternative for near-term financial developments. (p. 14)

In describing the technical context of the long-run policy analysis provided in the briefing process, the authors explain that

inputs considered by the senior staff in developing the forecasts [include]

projections from the staff's version of the MPS model, as well as judgmental

projections developed with the aid of surveys, leading and lagging indicators,

and other business cycle techniques. . . In addition to the "no change in

policy" forecast, there are supplemental forecasts based on alternative

monetary policy and fiscal policy alternatives. The FOMC debates the various

alternatives and selects a particular longer-run money growth target. (p. 12)

Because access to the contents of specific Bluebooks and Greenbooks is restricted for a period of five years subsequent to the FOMC meetings for which they are constructed, Lombra and Moran base their remarks on documentation from the period between 1970 and 1973. Thus, although these descriptions of staff briefing activities were published fifteen years ago, they actually pertain to the policy advice routine as it existed some twenty years ago. Despite this fact, the Lombra and Moran portrayal of economic analysis as it impacts the FOMC decision-making process is anything but dated: With very few (and very minor) changes, Lombra and Moran describe current briefing procedures as aptly as they do those of two decades ago.

This inertia in the methodology of monetary policy advice stands in stark contrast to the enormous ferment in theoretical and empirical macroeconornics that has oc- curred over the same period. Although advances in macroeconomics have certainly influenced the basic research agendas of Fed economists--and thus have significantly colored perceptions of the advice that is given--they have had remarkably little influence on the nuts and bolts of generating ongoing policy analysis as it is actually practiced.

We attribute this to two widely held beliefs. The first is the opinion that policymakers (and, more broadly, the general public) have been reasonably well served by traditional practices, not least because the cumulative wisdom of economic theory is internalized into the policy advice process through the good judgment of the people who give it. The second is the sense that state-of-the-art quantitative-theoretic models, which by necessity are highly stylized and abstract, are not equal to the real-time task of, in the words of Lombra and Moran, "developing an overall, integrated assessment of economic and financial developments, laying out feasible policy alternatives for consideration by policymakers and making specific policy recommendations. …

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