We perform this exercise with a structural forecasting model based on the New Keynesian dynamic stochastic general equilibrium methodology. We then employ this model to explore the expected behavior of economic variables, including the policy rate, under alternative policy rules. The policy rules help to benchmark the current stance of the federal funds rate, and they provide guidance on how the path of policy is likely to evolve in the context of the model. Such an exercise as part of a more comprehensive quarterly monetary policy report would enhance communication and promote a more systematic approach to monetary policy.
The views expressed in this report are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. We thank Gillian Courtney and Catherine O’Donnell for their assistance.View the Full Report