Maximising the Value of Economic Analysis and Forecasting for Central Banks

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Tuesday 18 September 2012


How the world has changed
Led by the chairman, David Mayes, Professor of Finance, Univeristy of Auckland

In this session, the chairman will outline the main themes of the seminar and invite delegates to reflect on, and share their views about, the most pressing challenges that they are facing at the current time. In particular, in recognition that many of the severe dislocations and collapses observed in financial markets would not have been possible under "standard" models, what new approaches are needed? What new techniques? The group will also consider the importance of not only developing a better understanding of the transmission of shocks from the financial sector to the real economy, but also understanding issues of financial fragility in their own right.

Failure of models to predict the crisis: lessons for economists
Charles Goodhart, Professor Emeritus, London School of Economics

Very few observers came close to predicting the scale of the global economic crisis that erupted in August 2007. And those who did predict a massive correction in financial markets, with the associated impact on the real economy, typically relied on anecdotal evidence and rule-of-thumb indicators that are far less sophisticated than the models employed by central banks and leading academics. What lessons can we draw from the widespread failure of central bank modelling and forecasting prior to the crisis? Which considerations need to be built into models in the future to improve their predictive power? This session, led by one of the preeminent scholars of central banking, will explore answers to these question.

The Financial stability role: new directions in economic forecasts

Bernd Braasch, Director, Financial Stability Department, Deutsche Bundesbank

In this session, the speaker will look at the increasing emphasis on financial stability in central banks and to the new directions needed for economic forecasts, in particular forward-looking models needed to navigate the post-crisis environment. The speaker will focus on the changing interdependence between the financial and the real sphere of the economy on a global and national level and changing transmission channels, identifying fields and approaches, which could enhance accuracy of economic forecasts under development. Participants will be encouraged to engage in discussion as the speaker outlines the path to more reliable economic forecasts.

Wednesday 19 September


Dynamic stochastic general equilibrium (DSGE) modelling: the state of the art

Scott Roger, Senior Economist, IMF

There has been great interest among economists working in academia and central banks over the development of dynamic stochastic general equilibrium (DSGE) models. Proponents of these models argue that they are at the cutting-edge of macroeconomic research and modelling, as they make it possible to combine microeconomic behavioural equations with empirically plausible estimations that fit macroeconomic time series. However, the use of DSGE modelling by central banks is still somewhat nascent. This session will describe the current state of DSGE modelling, outline their relevance to central banks and identify areas for further research including incorporating financial frictions, stress-testing and model-based vs judgment-based approaches to economic forecasts.

Reassessing workhorse models

Scott Roger

While a number of observers have noted that large structural models are unable to capture structural shifts in the global economy, they also struggle to reflect the impact on the real economy from inflationary pressures from financial shocks. Yet these models can still deliver important insights. In this session, the group will consider to what extent the workhorse models used in monetary policy analysis, such as vector auto-regressive, New Keynesian and computable general equilibrium models, have stood up to the test of practical experience with particular emphasis placed on experiences during 2011. The speaker, a senior economist with the IMF, will in the light of recent experience, suggest how central banks might better apply these models.

Preventing system failure: modelling interconnectedness

Thomas Nitschka, Senior Economist - Monetary Policy Analysis, Swiss National Bank

Increasingly, policymakers are looking to natural and behavioural sciences for insights into how systems work and - crucially - breakdown the notion that complexity inherently breeds resilience. The observation that financial systems exhibit robust-yet-fragile tendencies because of interconnections within the system poses serious problems for standard and hitherto unquestioned economic models. In this session, a Bank of England economist will set out the conclusions of this research, explaining how modelling interconnections within the system can identify systemic threats.

Understanding macroprudential instruments and their impact

Julia Giese, Economist - Financial Stability, Prudential Policy Division, Bank of England

The recent financial crisis has prompted an increasing number of countries to use macroprudential instruments. However, the use of these instruments is still relatively new. The question for financial stability economists is, therefore, whether they actually improve banking resilience or stabilise credit cycles. This session will explore recent research on the choice of instruments, the circumstances in which the instruments are used, and their effectiveness.

Publishing research: what are the objectives?

Workshop led by the chairman

Central banks publish research for an external audience in a variety of forms: working and research papers, inflation and financial stability reports, and monthly and quarterly reviews. External publication is done for a number of reasons. It can help disseminate information about the inputs that are shaping the central bank's policies, and it can trigger debate on areas of particular importance to policymakers, thereby improving the performance of central banks. This session takes a critical look at the motivations for publishing research externally and how these are changing in an era of low-cost information sharing. Discussion will also consider the question of who sets the research agenda for central banks.

Thursday 20 September


Interaction between researchers and policy-makers

Matthieu Bussière, Head of Division, International Macroeconomics Division, Banque de France

It is perhaps no surprise that policymakers and researchers struggle at times to communicate. The former's work cycle maybe in weeks or months, the latter's in years or even decades. Policymakers may need a model run or tweaked fast; researchers may regard such a quick fix at best as a chore, at worst as beneath them. This session will draw on the experience of the Banque de France and the European Central Bank in aligning the two different interests and cultures.

How and what to communicate to the monetary policymakers

Thomas Nitschka, Senior Economist - Monetary Policy Analysis, Swiss National Bank

As some Monetary Policy Committee members are not fully familiar with the workings of an "econometric model", the challenge remains how to get them more involved in the process and how to include their understanding and interpretation of results. What can researchers provide to policy makers? What kind of research do they need? This session will look at how to get the key information that policy makers need for decision making to them at the right time.

Providing data and analysis to central bank communications

Petra Geraats, St John's College, Cambridge University

Economists regularly mobilise statistics when presenting and offer advice to differing audiences. Statistics are not only vital tools for economists to ensure policymakers make informed decisions, but their publication is important to achieve accountability and can greatly impact the effectiveness of policy decisions. In this session, the speaker will provide some illustrative examples and stress the need for central banks to take into account uncertainty and to make the case for them to commit to regular information releases on monetary policy and financial stability. Delegates will have the opportunity to discuss the implications and challenges of this approach.

Highly leveraged institutions: prudent policy directions for central banks

Marcus Miller, Professor of Economics, University of Warwick

To explain the Japanese recession that followed the collapse of the asset bubble, Richard Koo has highlighted the balance-sheet pressures facing companies who financed expansion with debt collateralised on these assets. "Fire-sales" of assets to pay down the debt can exacerbate the problem. The externality involved here - where an individual's sales exert pressures on others to sell - provides the case for public intervention, via asset purchases (US), capital injections (UK) and the discounting of a wider range of assets (central banks of the US, UK and European Central Bank). Dealing with balance sheet pressures widens the role of the central bank almost beyond recognition - to include market making and capital supplying. A simple model of highly leveraged institutions will be used to illustrate these points and discuss further policy directions.

Friday 21 September


Economics: function or service?

Workshop led by David Mayes with Anders Vredin, Head of General Secretariat, Sveriges Riksbank

No one disputes that economists are an important resource for a central bank. But how can they best be used? And kept? Where can they add the most value? Pulled in many directions: reports, forecasts, briefings, speeches - they must constantly make a well-judged the decision about when and where to allocate time. In addition economists typically want to publish externally! This session will comprise a frank discussion about how to staff and run the economics resource at a central bank.

Measuring the performance and quality of economic research

Anders Vredin

Participants will split into smaller working groups to consider how to assess the performance and quality of economic research, and to examine some of the wider issues of the economist's role in the central bank. Working groups will also explore how central banks can best provide a good incentive structure for those involved in research to help achieve the desired performance. The session will focus on identifying the problems associated with measuring performance in economic research in the modern central bank, and the practical steps that have been taken to overcome these.

Closing remarks

Led by David Mayes

The course concludes with a session summarising the week's key themes and issues. Participants will identify and discuss how the debates from earlier sessions could be specifically applied to their own institution's challenges, priorities and solutions to enable them to more effectively deal with the dynamic economic markets of the future.