Surfacing how much Underground there is in the new BoE blog

Simon Wren Lewis joins in the celebration of the Bank of England’s new blog for staff.  But I think he can be read as going a bit too far in divining a message – and discernible dissent – in one of the first posts, by Haberis, Masolo and Reinold.

The Bank Underground compares two simulations of the distribution of inflation, one where the effective lower bound of 0.5 per cent constrains policy, and one where there is no constraint on monetary policy, and highlights the increased probability of deflation in the former relative to the latter.  Simon says ‘The blog does not discuss the policy implications, but they are pretty obvious.’  And goes on to explain that these implications are that, faced with such a risk when you are constrained, you should be overshooting the inflation target in the most likely scenario.

Simon clarified on Twitter that he didn’t intend this reading of his words, but, I think some might read him as saying ‘see how subversive the new blog is: they are allowing staff to communicate that they think the MPC should be overshooting the target’.

But there is nothing in the post to tell what the staff think is the most likely simulation.  The MPC have said on a few occasions that they ‘have the tools’ necessary to deal with the current conjuncture, which implies that they think they are unconstrained.  [Assertions that I think are hard to substantiate btw].  And the staff are careful not to contradict this message.  I suppose that the very fact that the constrained simulation is there at all might be interpreted as some sort of oblique hint.

The weighty issue of what one can and cannot read into a Wren-Lewis text aside, I’d give the Bank a ‘could do better’ mark for transparency on this post.

You can see that the senior management have gone with it because they think that by leading with a potentially sensitive topic they are signalling that this is going to be a forum for dissent and free thinking.

However, the very boldness of this signal of intent is contradicted somewhat by the editorial decision to ensure that the authors are silent about the main point.  That being, of course:  are the MPC to be thought of as constrained, contrary to how they describe themselves?  And is their distribution of future inflation given what they have in mind for their instruments too deflation-heavy or not?

[If it isn’t already obvious from the above, I don’t blame the authors for these things at all].

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6 Responses to Surfacing how much Underground there is in the new BoE blog

  1. C Milas says:

    Hi Tony,
    Many thanks for this post. Am I correct in noting that the blog simulations do not “adjust” for the opinions of the MPC members whereas the fan charts routinely reported in the Inflation Report do adjust? With this in mind, one could possibly argue that we should not read (as far as policy implications are concerned) too much in the blog simulations.
    Many thanks!
    Costas

  2. Tony Yates says:

    The MPC fan charts are created to match the judgements of MPC. The ones in this blog post by the staff are produced through stochastic simulation. This of course also begs the question what the staff think about the methodology underpinning the fan charts produced for the MPC.

  3. “You can see that the senior management have gone with it because they think that by leading with a potentially sensitive topic they are signalling that this is going to be a forum for dissent and free thinking.

    However, the very boldness of this signal of intent is contradicted somewhat by the editorial decision to ensure that the authors are silent about the main point.”

    Surely this just demonstrates that most likely the blog will be no more a vehicle for genuinely dissenting views than, say, the two Fed blogs have been. And that is probably realistic. I elaborated the point here http://croakingcassandra.com/2015/06/20/central-banks-blogging/

  4. marksastley says:

    I didn’t see the blog as that much of a criticism of the official line as they also said (but didn’t present nice chartsto illustrate) that the negative inflation skews pretty much disappeared when they changed the lower bound constraint from 0.5% to 0.0%. That could well be more reaslistic assumption in light of the raft of central banks (ECB, SNB, Riksbank, DNB) who’ve taken rates below zero to seemingly no major negative effects on their financial systems thus far (although of course early days and the UK could be different). And it now looks like a much nearer-term issue than it was at the heat of the crisis (could get into retrospective criticism that “lucky to get away with it” I guess). And no discussion of how the possibilty of (extra) QE fits into the simulations. But overall good to see a bit more opennes at the old lady – although would be even nicer if things like “forecast challenges” got put out there (fat chance?). And have they said whether there is any management oversight/editorial of the content of the blogs or how which blog is selected to be posted (haven’t seen anything)?

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