Model Catalog
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economic
FRB/US Policy Transmission
Economic
Current
active
Detailed policy transmission profile with stronger financing and labor sensitivity.
Horizon 2025–2032
Geography United States (primary); international via NiGEM linkage
Resolution Sector-level financing conditions and investment responses
Projection years 2025, 2026, 2027, 2028, 2029, 2030, 2032
Policy transmission
Financing conditions
Expectations channel
Wage dynamics
Credit spreads
Capex allocation
Clean-energy investment elasticity
Methodology
The Federal Reserve Board's FRB/US model is a large-scale econometric model of the US economy emphasising rational expectations, policy transmission, and financial conditions. It is particularly sensitive to the expectations channel — forward guidance and rate path credibility directly affect investment and consumption timing. CE adapts the model's policy transmission architecture to the six-sector framework by mapping financing conditions, credit spreads, and investment sensitivity to each industry's balance sheet structure and leverage. The model is the primary tool for stress-testing how interest rate paths affect sector-level capex allocation and decarbonisation investment decisions.
Key Mechanisms
- Rational expectations: agents use model-consistent expectations, making forward guidance and credibility central to outcomes
- Financial conditions index: credit spreads, equity risk premium, and mortgage rates transmit monetary policy to sector investment
- Labor market dynamics: wage bargaining, Phillips curve slope, and participation rate responses to policy are explicitly modelled
- Investment elasticity: each sector's capital expenditure responds differently to real interest rate changes — clean energy has the highest elasticity
- Inflation expectations anchoring: the degree to which expectations are anchored determines second-round effects from cost shocks
Best For
expectations-sensitive policy transmission and financing conditions
Strengths
- Best-in-class policy transmission: captures how monetary policy affects investment timing and sector-level financing costs
- Expectations sensitivity allows accurate modelling of how forward guidance changes corporate investment planning cycles
- Labor market detail captures sectoral skills mismatch and wage pressure dynamics relevant to green transition workforce shifts
Limitations
- US-centric: designed for the US economy; international spillovers require NiGEM for cross-border calibration
- Physical climate risk is not endogenous — it is treated as an external shock rather than a feedback mechanism
- Less suited to commodity-price-driven sectors (energy, agriculture) where global supply dynamics dominate over monetary policy
Industry Signal Dashboard
— projected signals from this model across all tracked industries
Growth Rate by Industry
Projected annual real GDP growth rate (%) for each industry under this model's default scenario.
Inflation by Industry
Projected price-level growth rate (%) per industry under this model.
Investment Index by Industry
Capital expenditure growth index — positive values indicate expanding investment activity.
Industry Context
Energy
FRB/US captures the energy sector's sensitivity to financing conditions — higher real rates suppress long-duration clean energy capex while short-cycle fossil investments are less affected. This creates a transition-retarding dynamic in fragmented policy regimes: monetary tightening disproportionately hurts the clean energy buildout relative to fossil operations. NextEra's 30-year asset life and BP's shifting capex mix are the primary calibration anchors.
Agriculture
The FRB/US model's agriculture calibration is primarily through commodity price channels and rural lending conditions. Agricultural investment is highly sensitive to the real rate environment and farm income expectations. Under fragmented policy, agricultural input cost pass-through (fertilizer, fuel — directly relevant to ADM and Tyson's cost structures) is imperfect, compressing margins and suppressing investment.
Manufacturing
Manufacturing is among the most policy-transmission-sensitive sectors in FRB/US. The model captures how equipment investment, capacity utilisation, and working capital costs respond to monetary policy shifts. Clean manufacturing (electrification, hydrogen) has higher interest rate elasticity than incumbent fossil-based operations — BASF's gas-intensive Verbund system and ArcelorMittal's green steel capex illustrate this asymmetry.
Transport
FRB/US captures transport's sensitivity to consumer confidence (passenger aviation — Delta), trade finance costs (freight — Maersk, FedEx), and fuel price expectations. Fleet electrification capex is highly rate-sensitive — long asset life, high upfront cost, fuel-cost NPV benefit at risk when discount rates rise. IMO compliance costs add a non-monetary cost layer modelled as a supply-side inflation shock.
Insurance
FRB/US is the primary model for insurance sector investment income dynamics. Insurance companies (Allianz, Zurich) hold large fixed-income portfolios — the model captures how rate normalisation improves investment yield while simultaneously increasing policy lapse rates. Net zero portfolio commitments from Allianz (NZAOA) and AXA are beginning to affect portfolio duration, creating a novel monetary-climate transmission channel.
Real Estate
FRB/US is the most relevant model for real estate given the sector's deep rate sensitivity — Vonovia's 60% valuation decline illustrates the mechanism. The model quantifies how mortgage rate levels, credit availability, and REIT financing costs transmit to construction starts and commercial property values. EPC mandates (British Land, Prologis) add systematic risk premiums not captured in the base model.