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Should the Bank of England also use dot plots? Bernanke will issue monetary policy recommendations for it

2024-04-08

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In July 2023, Bank of England Governor Andrew Bailey was criticized by MPs and economists as UK inflation remained high and above levels in the euro zone. fierce criticism.

That month, the Bank of England invited former Federal Reserve Chairman Ben Bernanke to lead a review of the bank’s economic forecasting process. This Friday (April 12), the Nobel Prize winner in economics will officially release a proposal to provide advice to the Bank of England in forecasting economic prospects.

Bernanke’s main research areas are monetary policy and macroeconomic history. In 2005, Bernanke served as chairman of the President's Council of Economic Advisers in the George W. Bush administration, and in 2006 he succeeded Greenspan as chairman of the Federal Reserve. For his outstanding contributions in the field of "Banking and Financial Crisis", he won the Nobel Prize in Economics in 2022.

Bernanke is expected to recommend a series of innovative measures to the Bank of England this week to update its process of forecasting the economy and repair its damaged reputation. Last month, BoE chief economist Huw Pill said the review "will provide a once-in-a-lifetime opportunity to update and improve the Monetary Policy Committee's framework".

According to some officials, Bernanke will introduce a series of options. Whether to implement them depends on the decision of the Bank of England's Monetary Policy Committee (MPC) and the opinion of British Finance Minister Jeremy Hunt. Two weeks ago, Bailey told the media that the "fan chart" introduced by the bank 30 years ago would soon be retired.

The fan chart Bailey mentioned is a statistical chart used to represent the possible range of future values of a random variable. It consists of a center line and a series of sectors that represent a range of future values at different confidence levels.

It is expected that this chart will be replaced by "scenarios" proposed by Bernanke, because scenario analysis can better convey the different positions held by MPC members. In fact, since last year, the Riksbank has been regularly using scenario analysis, which it considers “very important for policy communication.”

In addition, the Bank of England may try to use a "dot plot". It is understood that the dot plot first appeared at the Fed in late 2011, when officials were considering how to prepare the market for a shift in monetary policy measures after the financial crisis.

Both Bernanke and then-Vice Chair Janet Yellen (now U.S. Treasury Secretary) believed that dot plots could provide markets with a sense of the Fed's thinking beyond current policy decisions. Bailey told the media that members of the Monetary Policy Committee may feel the need to reveal their personal interest rate path.

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Should the Bank of England also use dot plots? Bernanke will issue monetary policy recommendations for it

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