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

RePEc Short ID: pcr107
ORCID iD: 0000-0002-7958-1818

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

Discussion Paper

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

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;

JEL Classification: E52;