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January 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, 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 -0.7 -1.5 -0.5
Lagged headline inflation -1.0 -1.7 -0.7
Projected headline inflation -0.9 -1.7 -0.7

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 ($$ \pi_t$$), inflation two and three quarters ahead ($$ \pi_{t+2|t}$$ and $$ \pi_{t+3|t}$$), the output gap in the current period and one quarter ahead ($$ y_t-y_t^*$$ and $$ y_{t+1|t}-y_{t+1|t}^*$$), and the three-quarter-ahead forecast of annual average GDP growth relative to potential ($$ \Delta^4y_{t+3|t}-\Delta^4y_{t+3|t}^*$$), and $$ \pi^*$$ denotes an assumed value of policymakers' long-run inflation objective. 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 $$ i_t = 1.20i_{t-1}-0.39i_{t-2}+0.19 \left[1.17+1.73\pi_t+3.66\left(y_t-y_t^*\right)-2.72\left(y_{t-1}-y_{t-1}^*\right)\right]$$
Forecast-based rule $$ i_t = 1.18i_{t-1}-0.38i_{t-2}+0.20\left[0.98+1.72\pi_{t+2|t}+2.29\left(y_{t+1|t}-y_{t+1|t}^*\right)-1.37\left(y_{t-1}-y_{t-1}^*\right)\right]$$
Taylor (1993) rule $$ i_t = 2+\pi_t+0.5\left(\pi_t-\pi^*\right)+0.5\left(y_t-y_t^*\right)$$
Taylor (1999) rule $$ i_t = 2+\pi_t+0.5\left(\pi_t-\pi^*\right)+\left(y_t-y_t^*\right)$$
First-difference rule $$ i_t = i_{t-1}+0.5\left(\pi_{t+3|t}-\pi^*\right)+0.5\left(\Delta^{4} y_{t+3|t} - \Delta^{4} y_{t+3|t}^*\right)$$

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

Federal Reserve Balance Sheet: End-of-Year Projections -- Alternative B
Dec 31, 2010 End-of-Year
2012 2014 2016 2018 2020
$ Billions
Total assets 2,428 2,858 2,079 1,430 1,592 1,779
Selected assets:
Liquidity programs for financial firms 0 0 0 0 0 0
Primary, secondary, and seasonal credit 0 0 0 0 0 0
Central bank liquidity swaps 0 0 0 0 0 0
Lending through other credit facilities 25 9 1 0 0 0
Term Asset-Backed Securities Loan Facility (TALF) 25 9 1 0 0 0
Support for specific institutions 113 47 35 23 10 7
Credit extended to AIG 46 0 0 0 0 0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III		 66 47 35 23 10 7
Securities held outright 2,161 2,651 1,920 1,303 1,488 1,683
U.S. Treasury securities 1,021 1,830 1,358 1,043 1,488 1,683
Agency debt securities 147 77 39 16 0 0
Agency mortgage-backed securities 992 743 523 244 0 0
Special drawing rights certificate account 5 7 7 7 7 7
Net portfolio holdings of TALF LLC 1 1 1 0 0 0
Total other assets 124 143 115 96 87 82
Total liabilities 2,375 2,788 1,986 1,307 1,430 1,565
Selected liabilities:
Federal Reserve notes in circulation 942 993 1,080 1,200 1,323 1,457
Reverse repurchase agreements 63 59 59 59 59 59
Deposits with Federal Reserve Banks 1,323 1,720 831 33 33 33
Reserve balances held by depository institutions 977 1,512 623 25 25 25
U.S. Treasury, general account 141 5 5 5 5 5
U.S. Treasury, supplementary financing account 200 200 200 0 0 0
Other balances 3 3 3 3 3 3
Total capital 53 70 93 123 162 215

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

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


Federal Reserve Balance Sheet: End-of-Year Projections -- Alternative A
Dec 31, 2010 End-of-Year
2012 2014 2016 2018 2020
$ Billions
Total assets 2,428 3,066 2,231 1,430 1,592 1,779
Selected assets:
Liquidity programs for financial firms 0 0 0 0 0 0
Primary, secondary, and seasonal credit 0 0 0 0 0 0
Central bank liquidity swaps 0 0 0 0 0 0
Lending through other credit facilities 25 9 1 0 0 0
Term Asset-Backed Securities Loan Facility (TALF) 25 9 1 0 0 0
Support for specific institutions 113 47 35 23 10 7
Credit extended to AIG 46 0 0 0 0 0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III		 66 47 35 23 10 7
Securities held outright 2,161 2,851 2,068 1,302 1,487 1,683
U.S. Treasury securities 1,021 2,030 1,506 1,041 1,487 1,683
Agency debt securities 147 77 39 16 0 0
Agency mortgage-backed securities 992 743 523 244 0 0
Special drawing rights certificate account 5 7 7 7 7 7
Net portfolio holdings of TALF LLC 1 1 1 0 0 0
Total other assets 124 152 120 98 88 82
Total liabilities 2,375 2,996 2,139 1,307 1,430 1,565
Selected liabilities:
Federal Reserve notes in circulation 942 993 1,080 1,200 1,323 1,457
Reverse repurchase agreements 63 59 59 59 59 59
Deposits with Federal Reserve Banks 1,323 1,928 984 33 33 33
Reserve balances held by depository institutions 977 1,720 776 25 25 25
U.S. Treasury, general account 141 5 5 5 5 5
U.S. Treasury, supplementary financing account 200 200 200 0 0 0
Other balances 3 3 3 3 3 3
Total capital 53 70 93 123 162 215

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

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


Federal Reserve Balance Sheet: End-of-Year Projections -- Alternative C
Dec 31, 2010 End-of-Year
2012 2014 2016 2018 2020
$ Billions
Total assets 2,428 2,649 1,922 1,430 1,592 1,779
Selected assets:
Liquidity programs for financial firms 0 0 0 0 0 0
Primary, secondary, and seasonal credit 0 0 0 0 0 0
Central bank liquidity swaps 0 0 0 0 0 0
Lending through other credit facilities 25 9 1 0 0 0
Term Asset-Backed Securities Loan Facility (TALF) 25 9 1 0 0 0
Support for specific institutions 113 47 35 23 10 7
Credit extended to AIG 46 0 0 0 0 0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III		 66 47 35 23 10 7
Securities held outright 2,161 2,451 1,768 1,305 1,489 1,683
U.S. Treasury securities 1,021 1,630 1,206 1,045 1,489 1,683
Agency debt securities 147 77 39 16 0 0
Agency mortgage-backed securities 992 743 523 244 0 0
Special drawing rights certificate account 5 7 7 7 7 7
Net portfolio holdings of TALF LLC 1 1 1 0 0 0
Total other assets 124 134 110 94 87 82
Total liabilities 2,375 2,578 1,829 1,307 1,430 1,565
Selected liabilities:
Federal Reserve notes in circulation 942 993 1,080 1,200 1,323 1,457
Reverse repurchase agreements 63 59 59 59 59 59
Deposits with Federal Reserve Banks 1,323 1,511 674 33 33 33
Reserve balances held by depository institutions 977 1,302 466 25 25 25
U.S. Treasury, general account 141 5 5 5 5 5
U.S. Treasury, supplementary financing account 200 200 200 0 0 0
Other balances 3 3 3 3 3 3
Total capital 53 70 93 123 162 215

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

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


Federal Reserve Balance Sheet: End-of-Year Projections -- Alternative D
Dec 31, 2010 End-of-Year
2012 2014 2016 2018 2020
$ Billions
Total assets 2,428 2,435 1,762 1,428 1,591 1,777
Selected assets:
Liquidity programs for financial firms 0 0 0 0 0 0
Primary, secondary, and seasonal credit 0 0 0 0 0 0
Central bank liquidity swaps 0 0 0 0 0 0
Lending through other credit facilities 25 9 1 0 0 0
Term Asset-Backed Securities Loan Facility (TALF) 25 9 1 0 0 0
Support for specific institutions 113 47 35 23 10 7
Credit extended to AIG 46 0 0 0 0 0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III		 66 47 35 23 10 7
Securities held outright 2,161 2,247 1,612 1,306 1,488 1,681
U.S. Treasury securities 1,021 1,426 1,051 1,045 1,488 1,681
Agency debt securities 147 77 39 16 0 0
Agency mortgage-backed securities 992 743 523 244 0 0
Special drawing rights certificate account 5 7 7 7 7 7
Net portfolio holdings of TALF LLC 1 1 1 0 0 0
Total other assets 124 125 105 93 86 82
Total liabilities 2,375 2,365 1,669 1,306 1,428 1,563
Selected liabilities:
Federal Reserve notes in circulation 942 995 1,079 1,198 1,321 1,456
Reverse repurchase agreements 63 59 59 59 59 59
Deposits with Federal Reserve Banks 1,323 1,295 516 33 33 33
Reserve balances held by depository institutions 977 1,087 307 25 25 25
U.S. Treasury, general account 141 5 5 5 5 5
U.S. Treasury, supplementary financing account 200 200 200 0 0 0
Other balances 3 3 3 3 3 3
Total capital 53 70 93 123 162 215

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

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

Last update: February 3, 2017