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zugzwang

Bank Of England Urged To Explain Its Forecasts

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Simply incredible.

Former Bank of England staff have criticised the central bank for not going far enough in explaining how it produces key forecasts.

The Bank’s workhorse model of the economy – Compass – underpins many of its forecasts, yet relatively little is known of it, despite its crucial role in informing the UK’s interest rate setters.

That model should be made public in its entirety, according to ex-Bank staff, a practice that would bring the Old Lady in line with its counterpart in the US.

Tony Yates, who worked at the Bank until 2013, told The Sunday Telegraph that releasing the model could enhance understanding of monetary policy, and provide benefits to the Bank itself.

“While a working paper with all the equations exists, it’s a lot of work to reproduce,” said Mr Yates.

Erik Britton, director of Fathom Consulting, ran the Bank’s UK macroeconomic model for five years, and led a team to reproduce the Bank’s older BEQM model. “Not to praise it, but to bury it.”

“BEQM had no measure of risk, no credit channel, no rule for housing, no government bond yields … that’s how they missed the biggest financial market crisis of all time.”

Since late 2011, Compass has been used to aid the Bank’s committee of interest rate setters – the Monetary Policy Committee (MPC) – sitting in a suite of more than 50 models.

At £2.8m the model’s cost was “a couple of orders magnitude larger than it should have been”, said Mr Britton, and yet the results are not available to the public.

“What is it they’re so scared about?” asked Mr Britton. “They’re funded by the taxpayer, so why should they be guarding the intellectual property?”

http://www.telegraph.co.uk/finance/bank-of-england/11079638/Bank-of-England-urged-to-explain-its-forecasts.html

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Is this their model that always produces the result that in 2 years' time everything will be fine no matter what the initial starting conditions are?

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Yeah I'm sure the model's super complicated. Somthing like: Let Max[F(u^c)k, e/m] + min[£,-li(fe)] + hA^3 = 0 (1)

Note that hA = f(un)/ny, hence implied social function vanishes and proving the validity of (1) as proportional to the power of your indifference curve.

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All economic models are based on mean reversion, so thats bound to happen. Problem is that we live in a new paradigm, so mean reversion no longer applies in the short term; more likely an economic schism (or stress tes - but even there i believe the BoE / PRA doesnt understand macro economics).

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I'm always up for joining in HPC banter an tom foolery but this time you chaps have gone to far.

Speaking as the lead developer of the the economic model, I can assure you the model is at the leading edge of econometric science - it did cost almost £3m you know.

An NDA prevent me from going into much detail but here's the high level design:

220px-Pinus_coulteri_MHNT_Cone.jpg

When its open the economy is growing. When its closed its shrinking.

I am currently working hard on on Compass V2.

We are having some technical problems - Mr Carney keeps hitting his finger when he tries to nail the seaweed to the wall.

I have devised a solution - Savlon thumb QE - a snip at 100k a tube.

Yours Sir Spy - for services to economic BS

Edited by spyguy

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All economic models are based on mean reversion, so thats bound to happen.

Not true, Steve Keen's macroeconomic models don't revert to the mean and are actually capable of producing crashes.

I don't really see the point in the kind of models the BoE and the OBR work with, you might as well just stick a piece of paper on the wall that says 'Keep Calm and Assume That Everything Will Be Fine In Two Years' and it would give you the same "information".

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Dorkins - all stochastic forecasting models need a projected mean around which to perturbate the outcomes. All stochastic models show an element of crash; but these are always at the margin. If someone produced a model that always projected crashes, they wouldn't use it! If Keens isnt using stochastic simulations, then he's about 20 years out of date.

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Dorkins - all stochastic forecasting models need a projected mean around which to perturbate the outcomes. All stochastic models show an element of crash; but these are always at the margin. If someone produced a model that always projected crashes, they wouldn't use it! If Keens isnt using stochastic simulations, then he's about 20 years out of date.

What's the track record of the economic models of the last 20 years like? How many predicted the current situation? Steve Keen's did.

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Dorkins - all stochastic forecasting models need a projected mean around which to perturbate the outcomes. All stochastic models show an element of crash; but these are always at the margin. If someone produced a model that always projected crashes, they wouldn't use it! If Keens isnt using stochastic simulations, then he's about 20 years out of date.

DSGE models neither represent the financial system accurately or allow for the possibility of severe recessions/depressions in which stochastic assumptions breakdown. This is why they failed utterly to predict what happened in 2008. The fact that the BoE has chosen to replace its existing macro model with a DSGE model like Compass speaks volumes about the institutional myopia in Threadneedle Street. Unless the Bank has done something radically different with the axiomatic foundations of Compass it will exhibit the same shortcomings.

Edited by zugzwang

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To claim that the BoE's model does not include government bond yields seems so extraordinary to be unbelievable. All models have bond yields.

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The only thing we need to know is that having a lender of last resort, able to print unlimited amounts of "reserves", produces a Moral Hazard swamp that has no place in capitalism. That they have models, is neither here nor there.

Just get rid of this Monetary Politburo Monstrosity.

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Is this their model that always produces the result that in 2 years' time everything will be fine no matter what the initial starting conditions are?

Quite.

The answer is 2% in 2 years. What was the question again?

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To claim that the BoE's model does not include government bond yields seems so extraordinary to be unbelievable. All models have bond yields.

I suppose when you personally control the bond yields it's a tad redundant.

Edited by R K

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I suppose when you personally control the bond yields it's a tad redundant.

Technically they don't, at least not the ten year yield. In reality it always looks as though the ten year yield tracks the base rate.

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Technically they don't, at least not the ten year yield. In reality it always looks as though the ten year yield tracks the base rate.

Well let's put it this way. If they want to drop the policy rate from 5.5% to 0.5% whenever they feel like it, they can (Ahh look, they did!)

Long term yields are mostly the sum of short term yields plus term/credit risk.

Edited by R K

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