Policy counterfactuals

What would the economy have looked like under a different monetary policy, according to a frontier macroeconomic model? Here you can construct policy counterfactuals using the computational methods described in Hebden and Winkler (2026).

Pick a policy start date and a model, then choose a policy rule or optimal control and see how the economy would have evolved under that policy given the data and forecasts consistent with the medians of the Summary of Economic Projections (SEP) of the FOMC (projections are from here). Move the simulation forward to see the counterfactual as it would have been decided in real time as the data and the forecast changed. Each counterfactual is computed in your browser.

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Dashed: long-run rate, inflation target, natural rate of unemployment and long-run GDP growth (the SEP-consistent projection's terminal value).

How it works

Each model's response to monetary policy is summarized by its sequence-space representation, and every counterfactual here — a simple rule or an optimal policy given a simple objective function with full commitment, with or without the effective lower bound — is solved using the efficient method of Hebden and Winkler.1 The counterfactual starts in the quarter of the SEP release; earlier quarters are historical data.

Three models are available. The first is a linearized version of the Federal Reserve's FRB/US model (LINVER),2 a large-scale estimated general-equilibrium model of the U.S. economy in use at the Federal Reserve Board since 1996. The second is the DGS-FHP model,3 a modified version of the model of del Negro, Giannoni and Schorfheide that attenuates the forward-guidance puzzle through finite-horizon planning for households; it is more sensitive to interest rates than FRB/US. The third is the Smets–Wouters (2007) model,4 a standard estimated New Keynesian model of the U.S. economy; in this model, unemployment is obtained from the output gap through an Okun's law relation (u − u* = −0.5 × gap). Each baseline is an SEP-consistent projection5 — the quarterly projection consistent with that quarter's FOMC Summary of Economic Projections — extended beyond the SEP horizon. GDP growth is measured over four quarters. The model dropdown also offers an illustrative, steeper version of LINVER (“FRB/US (LINVER), steep”).6

Source code

  1. Hebden, J. and F. Winkler (2026). “Computation of policy counterfactuals in sequence space.” Journal of Economic Dynamics and Control 182, 105228. doi:10.1016/j.jedc.2025.105228. Working paper version: Hebden, J. and F. Winkler (2021, revised 2024). “Computation of Policy Counterfactuals in Sequence Space.” Finance and Economics Discussion Series 2021-042r1, Board of Governors of the Federal Reserve System. doi:10.17016/FEDS.2021.042r1 ↩
  2. Brayton, F. and D. Reifschneider (2022). “LINVER: The Linear Version of FRB/US.” Finance and Economics Discussion Series 2022-053, Board of Governors of the Federal Reserve System. doi:10.17016/FEDS.2022.053 ↩
  3. del Negro, M., M. P. Giannoni and F. Schorfheide (2015). “Inflation in the Great Recession and New Keynesian Models.” American Economic Journal: Macroeconomics 7(1), 168–196. doi:10.1257/mac.20140097. Modified as in Arias, J. E., M. Bodenstein, H. T. Chung, T. Drautzburg and A. Raffo (2020). “Alternative Strategies: How Do They Work? How Might They Help?” Finance and Economics Discussion Series 2020-068, Board of Governors of the Federal Reserve System. doi:10.17016/FEDS.2020.068 ↩
  4. Smets, F. and R. Wouters (2007). “Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach.” American Economic Review 97(3), 586–606. doi:10.1257/aer.97.3.586 ↩
  5. Economic projections are collected from each member of the Board of Governors and each Federal Reserve Bank president four times a year, in connection with the FOMC meetings in March, June, September and December. Participants provide yearly projections for the current and next two or three calendar years, and for the “longer run,” of real GDP growth, the unemployment rate, and headline and core PCE inflation, along with their individual assumptions for the appropriate federal funds rate. Federal Reserve staff use a model-guided interpolation and extrapolation procedure, together with current economic data, to build quarterly series consistent with these projections; the resulting series need not represent the projections of the Committee or of any participant. The staff regularly publishes these series as part of the FRB/US model package, available at federalreserve.gov/econres/us-models-package.htm. ↩
  6. “FRB/US (LINVER), steep” is not an estimated model. It uses LINVER's responses to anticipated monetary policy shocks, but multiplies the responses of inflation by 10 and those of unemployment, the output gap and GDP growth by 2; the response of the funds rate and the SEP-consistent projections are unchanged. It describes an economy in which monetary policy has much stronger effects than in FRB/US, and shows how much the counterfactuals depend on how strongly policy transmits to inflation and activity. ↩