The Bank of England (BoE) has revealed details of its forecasting platform, which it said the BoE’s rate-setting monetary policy committee (MPC) has been using since autumn 2011 to help put together its quarterly economic forecasts.
“The MPC’s judgement is paramount when agreeing their forecasts, but the process also relies on a range of economic models,” the BoE comments. “The new forecast platform includes a central organising model [called COMPASS], an enhanced suite of forecasting models, and new IT tools to assist the forecast process.” The Bank has now issued a paper providing detailed documentation of each of these components of the platform, which it says has been published to elicit comments and further debate.
Spencer Dale, the BoE’s chief economist, said he welcomed the work, adding: “The MPC’s forecasts are not based on a single economic model and rather reflect our collective judgements about the economy. But the large suite of economic models developed at the BoE, and documented [in the paper] helps to inform that judgement. I look forward to discussing the Bank’s forecasting models with other economists and hope that this paper helps to spur debate.”
The paper describes COMPASS as a ‘New Keynesian’ general equilibrium model that shares many features with similar models in use at other central banks and policy institutions. Prices and wages are assumed to be sticky, so monetary policy affects output and employment in the short to medium-term. Expectations of future events, including the actions of monetary policy makers, can also affect current output and inflation.
COMPASS provides the basic set of relationships that articulate core macroeconomic mechanisms and provides a disciplining framework by ensuring that forecasts are internally consistent. COMPASS itself only provides forecasts for 15 variables: ‘key’ macroeconomic series such as gross domestic product (GDP), inflation, interest rates, trade, wages and consumption.
The BoE also reveals that COMPASS is smaller and simpler than previous central models it has employed. This makes it easier to estimate and to use, enabling BoE staff to produce timely updates to the MPC’s forecast in the weeks ahead of an Inflation Report.
However, it also implies some sacrifice of detailed economic structure. To compensate for that, the suite of models is very much an equal partner in the new forecasting platform. The suite contains over 50 separate models, covering “a huge range of different frameworks and ways of thinking about the economy”. Different models can be selected from the suite, depending on what insight is required. The suite provides the means to cross-check the projections in COMPASS, expand the forecast to cover more variables, and challenge the key judgements in the forecast.
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