This put up presents an replace of the financial forecasts generated by the Federal Reserve Financial institution of New York’s dynamic stochastic basic equilibrium (DSGE) mannequin. We describe very briefly our forecast and its change since June 2021.
As regular, we want to remind our readers that the DSGE mannequin forecast is just not an official New York Fed forecast, however solely an enter to the Analysis workers’s total forecasting course of. For extra details about the mannequin and variables mentioned right here, see our DSGE model Q & A.
The important thing driver of the mannequin’s forecast over each the quick and the medium run is the response of the financial system to the COVID-19 pandemic. To seize the large and abrupt macroeconomic results of the virus, in addition to their sooner retreat in comparison with customary enterprise cycle dynamics, the mannequin is augmented with a number of transitory demand and provide shocks beginning in 2020:Q1 (the model description on our GitHub page describes these adjustments in some element). Beginning in 2020:Q2, the COVID-19 shocks are additionally partly anticipated one quarter forward. This anticipation captures the truth that the pandemic has been persistent and anticipated to be so since shortly after its inception, though its period stays unsure. The usual deviations of those pandemic shocks are estimated, letting the information settle the relative significance of shortfalls in provide or demand in driving the decline in financial exercise. The usual deviations of the usual enterprise cycle shocks through the pandemic are allowed to deviate from their counterparts in regular instances and are additionally estimated. Not like in June, the mannequin now contains a further, negatively autocorrelated measurement error in inflation. This enables the mannequin to seize transitory, mean-reverting adjustments within the value degree related to the pandemic.
Beginning in 2020:This autumn, we assume that financial coverage follows a brand new response operate, common inflation focusing on (AIT), reflecting the adjustments within the FOMC monetary policy strategy announced last August. The parameters of the brand new rule are such that the coverage charge lifts off its efficient decrease certain (ELB) within the second half of 2023. Upon its introduction, we assume that brokers’ consciousness of the brand new coverage is partial however rising over time. Extra particularly, expectations are primarily based on a convex mixture of the outdated and new response capabilities, with the load on the latter converging to 1 over six years. This modelling method captures the truth that expectations are prone to adjust only gradually to the introduction of the new policy strategy, particularly with the coverage charge caught on the ELB, since brokers can’t observe immediately its response to macroeconomic developments till liftoff.
The September 2021 mannequin forecast is reported within the desk beneath, alongside the one from June 2021, and depicted within the following charts. The mannequin makes use of quarterly macroeconomic knowledge launched via 2021:Q2, augmented for 2021:Q3 with the median forecasts for actual GDP development and core PCE inflation from the August SPF launch, in addition to the yields on 10-year Treasury securities and Baa company bonds primarily based on 2021:Q3 averages as much as August 16.
How Do the Newest Forecasts Evaluate with the Ones from June?
- Modifications within the forecast relative to June replicate each new knowledge launched over the previous three months, and adjustments within the mannequin parameters and the mannequin specification. Whereas the change in parameters and mannequin specification had comparatively minor results on the forecast, the brand new knowledge on inflation have been a considerable upside shock, leading to a lot stronger short-term inflation projections, and weaker short- and medium-run output projections, relative to June. Particularly, core inflation is projected to succeed in 3.8 p.c in 2021, effectively above the June forecast of two.2 p.c. The mannequin attributes a part of this enhance to a persistent cost-push shock, and a part of it to transitory measurement error. Consequently, the mannequin expects the rise in inflation to be largely non permanent, with core inflation declining to 2.2 p.c in 2022, 1.9 p.c in 2023, and 1.8 p.c in 2024. Whereas projected inflation stays considerably above the June forecast in 2022 (1.9 p.c), it is the same as the June forecast in 2023, and barely beneath the June forecast for 2024 (2.0 p.c).
- The associated fee-push shocks resulting in larger inflation projections have a damaging impact on output for 2 causes. First, these provide shocks have a direct impact on output, particularly within the quick and medium run. Second, larger realized inflation in 2021 raises common inflation, resulting in a steeper path of coverage after liftoff relative to the June forecast, on condition that the AIT rule reacts to common inflation. This much less accommodative coverage after liftoff results in a weaker path of output development than was projected in June, significantly in 2023 and 2024 (and to decrease inflation, as mentioned above). The imply forecast for actual GDP development (This autumn/This autumn) is 5.3, 1.7, 0.8, and 0.7 p.c in 2021, 2022, 2023, and 2024, respectively, in comparison with 5.4, 2.6, 1.7, and 1.0 p.c in June.
- Estimates of the true pure charge and its future evolution are broadly just like these in June, with the pure charge predicted to be about -0.2 p.c by the top of 2021 and rising to 0.6 p.c by the top of 2024.
Forecasts of Output Progress
Forecasts of Inflation
Actual Pure Charge of Curiosity
Marco Del Negro is a vp within the Financial institution’s Analysis and Statistics Group.
Keshav Dogra is a senior economist within the Financial institution’s Analysis and Statistics Group.
Shlok Goyal is a senior analysis analyst within the Financial institution’s Analysis and Statistics Group.
Alissa Johnson is a senior analysis analyst within the Financial institution’s Analysis and Statistics Group.
Aidan Gleich is a senior analysis analyst within the Financial institution’s Analysis and Statistics Group.
Learn how to cite this weblog put up:
Marco Del Negro, Keshav Dogra, Shlok Goyal, Alissa Johnson, and Aidan Gleich “The New York Fed DSGE Mannequin Forecast—September 2021,” Federal Reserve Financial institution of New York Liberty Road Economics, September 24, 2021, https://libertystreeteconomics.newyorkfed.org/2021/09/the-new-york-fed-dsge-model-forecastseptember-2021.html.
The views expressed on this put up are these of the authors and don’t essentially replicate the place of the Federal Reserve Financial institution of New York or the Federal Reserve System. Any errors or omissions are the accountability of the authors.