BANK OF ENGLAND MACRO ECONOMIC MODEL
The Bank of England (1999, 2000) has presented a report on its approach to
macroeconometric modelling. The general implication of that document is
that a pluralist
approach is adopted where the models utilised include small-scale
macroeconomic models
and vector autoregression models. Here we focus on the macroeconometric
model as set out
in Bank of England (1999, 2000). We do this as we believe that the model
reveals the
underlying structural equations and enables us to interpret the general mode
of the Bank’s
analysis.. The full set of equations which describe our simplified version of
the Bank of England
macroeconometric model. The first ten equations are behavioural ones and
the remaining eight are definitional We may utilise the following model which
has the characteristics of such a current ‘consensus’ model (see, for
example, Meyer,20016):
(i) Ygt = a0 + a1 Y g
t-1 + a2 E (Ygt-1) – a3 [Rt – Et (pt+1)] + s1
(ii) pt = b1Y t + b2pt-1 + b3Et (pt+1) + s2
g
(with b2 + b3 = 1)
(iii) Rt = RR* + Et (pt+1) + c1Y t-1 + c2 (pt-1 – pT)
g
Where Yg is the output gap, R is nominal rate of interest, p is inflation, and p T
is inflation
target, RR* is the ‘equilibrium’ real rate of interest (that is the rate of interest
consistent with
zero output gap which implies from equation 2 a constant rate of inflation),
and si (with i = 1,
2) represents stochastic shocks.
Equation (i) is the aggregate demand equation; equation (ii) is a Phillips
curve and equation
(iii) is a monetary policy operating rule which replaces the old LM-curve.7
There are three
equations and three unknowns: output, interest rate and inflation. Such a
model has a number
of intriguing characteristic: money has no role in the model; the operating
rule implies that
‘policy’ becomes a systematic adjustment to economic developments rather
than an
exogenous process; there are both lagged adjustment and forward-looking
elements; the
This study source was downloaded by 100000858663287 from CourseHero.com on 12-23-2022 20:37:09 GMT -06:00
https://www.coursehero.com/file/28686408/BANK-OF-ENGLAND-MACRO-ECONOMIC-MODELdocx/
The Bank of England (1999, 2000) has presented a report on its approach to
macroeconometric modelling. The general implication of that document is
that a pluralist
approach is adopted where the models utilised include small-scale
macroeconomic models
and vector autoregression models. Here we focus on the macroeconometric
model as set out
in Bank of England (1999, 2000). We do this as we believe that the model
reveals the
underlying structural equations and enables us to interpret the general mode
of the Bank’s
analysis.. The full set of equations which describe our simplified version of
the Bank of England
macroeconometric model. The first ten equations are behavioural ones and
the remaining eight are definitional We may utilise the following model which
has the characteristics of such a current ‘consensus’ model (see, for
example, Meyer,20016):
(i) Ygt = a0 + a1 Y g
t-1 + a2 E (Ygt-1) – a3 [Rt – Et (pt+1)] + s1
(ii) pt = b1Y t + b2pt-1 + b3Et (pt+1) + s2
g
(with b2 + b3 = 1)
(iii) Rt = RR* + Et (pt+1) + c1Y t-1 + c2 (pt-1 – pT)
g
Where Yg is the output gap, R is nominal rate of interest, p is inflation, and p T
is inflation
target, RR* is the ‘equilibrium’ real rate of interest (that is the rate of interest
consistent with
zero output gap which implies from equation 2 a constant rate of inflation),
and si (with i = 1,
2) represents stochastic shocks.
Equation (i) is the aggregate demand equation; equation (ii) is a Phillips
curve and equation
(iii) is a monetary policy operating rule which replaces the old LM-curve.7
There are three
equations and three unknowns: output, interest rate and inflation. Such a
model has a number
of intriguing characteristic: money has no role in the model; the operating
rule implies that
‘policy’ becomes a systematic adjustment to economic developments rather
than an
exogenous process; there are both lagged adjustment and forward-looking
elements; the
This study source was downloaded by 100000858663287 from CourseHero.com on 12-23-2022 20:37:09 GMT -06:00
https://www.coursehero.com/file/28686408/BANK-OF-ENGLAND-MACRO-ECONOMIC-MODELdocx/
