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The FRB/US macroeconometric model of the U.S. economy was created at the Federal Reserve Board for use in policy analysis and forecasting. This article begins with an examination of the modelamp;amp;#x27;s characterization of the monetary transmission mechanism -- the chain of relationships describing how monetary policy actions influence financial markets and, in turn, output and inflation. The quantitative nature of this mechanism is illustrated by estimates of the effect of movements in interest rates and other factors on spending in different sectors and by simulations of the effect of a change in the stance of policy on the economy as a whole. After the discussion of the transmission mechanism, the article considers the influence of monetary policy on the macroeconomic consequences of specific events by showing how the predicted effects of selected disturbances change under alternative policy responses. These examples illustrate an important policy tradeoff in the FRB/US model involving the variability (but not the level) of output and inflation: Past some point, lower variability in inflation can be obtained only at the expense of greater fluctuations in output and interest rates.
Reifschneider et al. (Fri,) studied this question.