A new Bank of England paper series just dropped

Looks like the Bernanke review is starting to work

Just about a year and two months ago, Ben Bernanke completed and published his review of the Bank of England’s forecasting approaches, operational frameworks, monetary policy decisions, and their communication. 

Old Ben did not hold back any punches. His review was quite brutal, slamming the central bank for “material under-investment” in its forecasting equipment, with several “makeshift fixes” in a complicated system which wasted staff time. 

For those unfamiliar with the matter, Bernanke’s review was largely operationally focused. He refrained from making specific comments evaluating the monetary policy decisions of the BoE, but he did comment about the way in which decisions were made, and how forward guidance was communicated. 

There was a big kerfuffle in the media about it, we even appeared in the FT, with the view that it was the Bank of England’s group-think culture that caused most of the problems, and while operational changes are useful, they won’t solve any future misses in rate-setting decisions. 

Since then, I’ve briefly retired my monetary policy hat to comment on fiscal policy as well as the OBR, but I have been meaning to write a follow up to our brief review of the Bernanke review for a while now. Since last year, many discussions were held at the MoG where I floated my ideas of operational reform at the Bank of England. Perhaps a Bank staffer was in the vicinity, because one of these very ideas is awfully similar to the Banks new Macro Technical Paper series.

My view was that the BoE should publish a series of papers purely designated for model upkeep and development. The idea here is that if a model is not good enough to be put into an academic paper, where it can be publicly scrutinised, it probably shouldn’t be used in forming decisions surrounding monetary policy. 

There is also the benefit of increased accessibility to the Bank’s frameworks. Any schmuck who wants to comment on monetary policy can now do so by analysing the Bank’s models, maybe even developing them and independently testing them to see where they break. A BoE researcher can then read these pieces of independent research, decide whether or not the critiques are warranted, and then improve the model, publish a new paper, and show the public that the Bank has a steadfast commitment to listening and integrating a diverse range of viewpoints which helps reducing the same groupthink culture we highlighted in our letter to the FT. 

I was quite pleasantly surprised when I started reading the new set of BoE papers. While their titles of “Decompositions, forecasts and scenarios from an estimated DSGE model for the UK economy” probably only spur excitement for monetary policy nerds, there is an outline of the purpose of the Macro Technical Paper series which should inspire confidence in most readers.

Dr Bernanke’s 2024 review of the monetary policymaking processes at the Bank of England provided a number of constructive recommendations for reform which we are taking forward.

This included improving our model maintenance and development. Macroeconomic models and frameworks play an important role in the monetary policy process. To maximise the value of macroeconomic models, they must be well documented and continuously improved as time goes on.

This Macro Technical Paper (MTP) series is part of the Bank’s response to Dr Bernanke’s recommendations. These MTPs are authored by Bank staff, and are intended to document models, analysis, and conceptual frameworks that underpin monetary policy preparation. The models documented in the series will typically be used to assess the current state of the economy, forecast its future, and to simulate alternative paths and policy responses.

This is excellent news for the development and continuous discussion of how monetary policy is conducted in Britain. Of course, these papers are very technical pieces of work which require a high level of understanding and technical ability to recreate, this is where I think the BoE could do better.

For those who have worked in a corporate environment, you will know that building efficient, easy to change, and efficient infrastructure is what makes a good economist. In his review, Bernanke had mentioned that “makeshift fixes” to Bank infrastructure (most likely Excel files) created a complicated system which wasted staff time. 

I think the Bank should take a step further in this new direction and provide Excel/STATA/Eviews/Python (or whatever file they use for the development of these models) as attachments to paper series, speeches, and maybe even working papers. Unlike the private sector where there is a profit incentive for you to not give away your hard work and expertise for free, central banks and public institutions are not subject to this desire. The goal should be to make their methodologies as easy to improve upon and access as physically possible.

Most of us (including myself) also don’t have the time in their weekends or at their jobs to recreate these models from scratch. Such a practice would also put pressure on Bank economists to make good infrastructure that can be easily improved upon in the future, and for that matter, critiqued by non-Bank economists. It would greatly boost the transparency of the central bank, and by implication, have positive effects on confidence if the published models are continuously developed.