The main recommendations of the Bernanke Review
On April 12, 2024, the Bank of England released the report “Forecasting for monetary policy-making and communication at the Bank of England: a review.” The Bernanke Review, as it is now referred to, was an independent evaluation of the Bank of England’s forecasting methods, particularly in light of recent economic shocks and the need for improved monetary policy making and communication. In this commentary, Stephen Millard summarizes the main recommendations:
On the infrastructure:
- The Bank should prioritise its ongoing updating and modernisation of software to manage and manipulate data.
- The Bank should also prioritise model maintenance and development. Over the longer term, the Bank should look to replace or, at a minimum, thoroughly revamp its main forecasting model, COMPASS.
- The new forecasting framework should, at the very least, include a realistic representation of the monetary transmission mechanism, short and long-run inflation expectations, a wage-price system with gradual adjustment to shocks and wages affecting prices and vice versa, detailed models of the housing, energy and financial sectors, and greater attention to the supply side.
On the forecasting process:
- More attention should be paid to forecast errors and what can be learnt from them so that policy can quickly and flexibly adjust to shocks as they affect the economy.
- The Bank should consider whether it can deploy its staff in ways that improve the forecasting infrastructure and forecast quality.
- The central forecast should be regularly augmented by alternative scenarios decided upon at an early stage of each forecast round by the MPC and staff.
On communicating monetary policy:
- The Bank should publish selected alternative scenarios in the Monetary Policy Report, along with the central forecast.
- The MPC should de-emphasise the central forecast based and be particularly clear to let people know where the forecast conditioning assumptions are inconsistent with its view of the outlook.
- The MPC should replace or cut back the detailed quantitative discussion of economic conditions in the Monetary Policy Summary in favour of a shorter and more qualitative description, following the practice of most peer central banks.
- The fan charts should be eliminated.
- The Bank should implement the changes proposed in the report in phases, first improving the forecasting infrastructure, while moving cautiously in adopting changes to policymaking and communications.
Exploring the Bernanke Review
By: Stephen Millard – NIESR
Forecasting for monetary policy making and communication at the Bank of England: a review
By: Bank of England
Reactions to the Bernanke Review
The Qatar Center for Global Banking and Finance published an e-book with reactions from from prominent UK macroeconomists both from academia and the private sector. This e-book is edited by David Aikman (King’s College London) and Richard Barwell (BNP Paribas Asset Management). Some main issues raised by the authors are related to:
- The emphasis on scenario analysis: Charles Goodhart (LSE) observes: “the number of potential scenarios is huge, and the choice of which scenario to adopt is, surely, even more ad hoc than the fan chart.” Ben Navarro (CITI) also argues: “Employing scenarios, without first ensuring a more developed monetary policy strategy, may prove somewhat self-defeating, at least as a means to improve communication. And at worse, this could inhibit effective policy discussion.”
- The demise of fan charts: Francesca Monti (UCLouvain) argues: “The only point of the Bernanke review that finds me in strong disagreement is the recommendation to drop the fan charts, because quantifying the uncertainty around the forecast is important in helping the market understand the policy decision. It is undeniable, though, that the fan charts could be improved.”
- The forecasting process: David Meaning (Barclays) discusses why the Bank’s staff needs to have ownership of the forecast: “From a decision-making point of view this would allow MPC members to focus on why they disagree or deviate from the staff’s view, using the forecast as a neutral, internally consistent base to launch discussion from, without the complication of needing to see one’s own view reflected. These differences, once uncovered, could be explored and expressed through scenarios, which Dr Bernanke’s review rightly championed, without the need to taint the forecast itself. ” David Aikman (King’s College) adds: “Dr Bernanke’s recommendations seem to implicitly suggest that the Bank should move towards a Fed-style recruitment model of economists with doctoral degrees. This has never been the model at the Bank and it’s not clear a priori that such a route is preferable per se to recruiting the cream of the population of newly minted graduates. The most impressive colleagues I had during my time at the Bank were typically in the latter category.”
The Bernanke Review: Responses from Bank of England Watchers
Edited by: David Aikman and Richard Barwell – Kings College London
