Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

I have a question for David. I think one way of summarizing the Greenbook forecast is to say that the equilibrium real federal funds rate that is implicit in that forecast is very low. As I read it, it’s on the order of 1 percent, which I interpret as very depressed relative to the equilibrium real funds rate that would be implicit in the FRB/US model, for example. I would find it helpful if you could pinpoint what the source of this divergence is. By that I mean which components of spending or aggregate demand do you see as particularly depressed relative to what the FRB/US model would predict? Where are the model’s residuals large? A related question, in light of the comment that you just made, involves the gap between the Greenbook forecast and the FRB/US model forecast of the exchange rate. Simply running the model, given what has happened to net exports, I suspect that one would predict a substantial decline in the real exchange rate. The Greenbook is projecting a much flatter path of the real exchange rate. Is it because net exports are the big source of the divergence that you have the very low equilibrium funds rate?

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