The Bank of England has just published three reviews of aspects of its performance over the last few years. These reviews were controversial before they were published: Andrew Tyrie, chair of parliament’s Treasury Select Committee, says that “the Bank of England has yet to produce a comprehensive review of the Bank's role in, and response to, the crisis. The decision to commission these reviews fell well short of what was required."
One of the reviews, by Dave Stockton (former Director of Research and Statistics at the US Fed), looks at the MPC’s forecasting capability. I want to discuss just one small part of that review, which I think illustrates how macroeconomic discussion of policy has appeared to degenerate in the UK over the last twenty years. (There is a lot else of interest in the reviews: see here for example.) The Bank’s current forecasting model, a DSGE model, is called Compass. Stockton notes that (para 92): “Compass has now been in active use by the staff as input into the forecast for nearly a year. However, interested parties outside the Bank have little to no understanding of the model and its key features.”
There is a very simple reason why those interested parties have little or no understanding. The Bank has not published any details of the model. In a speech by Spencer Dale in March, there is a footnote that says: “It is a DSGE model that explains the behaviour of 16 – a relatively small number – of macroeconomic variables in terms a set of underlying economic shocks. In general, the structure of COMPASS is similar to models used in other central banks, although a few aspects have been tailored specifically to the UK economy. Further details of COMPASS will be published in due course.” And that, as far as I can find out, is all anyone outside the Bank knows.
But is anyone too bothered by this lack of transparency? They used to be. Less than ten years ago, when the Bank published their previous model BEQM (which I have written about here), the model was launched at a one day conference which was attended – from my rather jet-lagged memory – by a large number of UK academics and macro analysts who showed great interest in the model, and who were rather frustrated at the lack of detail provided on that occasion. Going further back, there was continuous and active discussion of the properties of the main macromodels used in the UK mediated by the ESRC’s Macromodelling Bureau, which I have talked about here.
When monetary and fiscal policy was in the hands of the UK Treasury, the Treasury model was subject to detailed scrutiny. It was and still is available for outsiders to use (which a UK MP, Jeremy Bray, took full advantage of). Treasury macro analysis, including work on the model, was examined by their ‘Academic Panel’, which contained some of the leading UK macroeconomists at the time. Nothing like this exists at the Bank.
So what is behind this gradual disengagement of the tools of monetary policy from the UK academic community? Is it that, in the era of the Great Moderation, the issues became less controversial or interesting? Was the transition of monetary policy from the UK Treasury to a more insular Bank a factor? Did the transition from empirically based econometric models to DSGE analysis play a part? Whatever the reason, it does seem regrettable that the Bank has been using a model to produce its forecast for a whole year that no one knows anything about.