History of macro models (and computing) at the Federal Reserve

Nice bit of history by David Price.

It starts with this fab story on how a physicist Frank Adelman got into macro modelling:

One evening in the fall of 1956, Frank Adelman, a physicist at the Berkeley Radiation Laboratory — now the Lawrence Livermore National Laboratory — came home from work with a question for his wife, Irma, a Berkeley economist. He wanted to try writing a program for the lab’s new IBM 650 vacuum-tube computer, but he had found that all of the physics problems he considered interesting were too complex. He asked Irma whether she thought there was an economic model that he could use instead.

“A few days later,” she remembered, “I presented him with a copy of the book by Laurie [Lawrence] Klein and Art Goldberger, An Econometric Model of the United States 1929-1952.”

Frank obtained approval from his boss for one free hour of central processor time, with the stipulation that they would have to reimburse the lab for any additional time at an hourly rate of $600, several times her monthly salary. The couple then set to work together on writing code for Klein and Goldberger’s 25-equation model of the U.S. economy. Their new side project was a journey into uncharted territory: Before then, the results of such models had been worked out by human assistants — known as “computers” or “computors” — wielding slide rules or mechanical calculators.

Working in the lab’s computer room at night, loading the code and data via punched IBM cards, the Adelmans had an initial version ready to present at an economics conference a little more than a year later. Frank’s boss, impressed, allowed them a second free hour, which they used to create a more elaborate version, the results of which appeared in 1959 in the journal Econometrica.

🙂 I wish econometrics classes started with such stories for motivation.

Then the note takes us through the development of macro modelling at Fed…

From this modest start, the science — and, some would say, the art — of computer modeling of the economy has become indispensable to policymakers and businesses seeking to forecast economic variables such as GDP and employment or to analyze the likely effects of policy changes. The Fed’s main computer model since the mid-1990s, known as FRB/USOffsite (commonly pronounced “ferbus”), has about 380 equations covering the behavior of households, firms, inflation, relative prices, numerous interest rates, and government taxes and spending (at the federal, state, and local levels), among other phenomena.

Yet even as large-scale macroeconomic models such as FRB/US have attained a role probably undreamed of by Irma and Frank Adelman, their usefulness is debated within economics circles — a reflection of a rift, starting in the 1970s, between many research economists in academia and their counterparts in policymaking institutions and businesses.

 

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