What is the Bernanke Review?

On Friday 12 April 2024, Dr Ben Bernanke, Nobel Laureate and former Chair of the
Federal Reserve Board, published his landmark review into “Forecasting for monetary
policy making and communication at the Bank of England”. The remit for this report was to
consider “the appropriate approach to forecasting and analysis in support of decisionmaking and communications in times of high uncertainty from big shocks and structural
change…”. The Bank has said that it will consider the recommendations in depth and will
provide an update on proposed changes by the end of the year.
This book is a compendium of individual reactions to the Bernanke Review from a large set
of prominent UK macroeconomists. It includes opinion pieces from both academics and
economists working in financial markets and business; many are former MPC members or
former Bank staff economists with experience in the forecast and model development
process. Each author had complete discretion over which aspect of the Review to focus on;
the pieces reflect the views of individual authors only and should not be taken to represent
those of other contributors or the institutions they work for

The Bernanke Review’s recommendations

The Bernanke Review makes 12 recommendations covering: (a) the infrastructure the Bank
uses for forecasting and analysis; (b) the use of the forecast in the MPC’s decision-making
process; and (c) the communication of the MPC’s outlook and policy rationale to the
public. The recommendations are as follows:

R1. The ongoing updating and modernisation of software to manage and manipulate data
should be continued with high priority and as rapidly as feasible.

R2. Model maintenance and development should be an ongoing priority, supported by a
significant increase in dedicated staff time and adequate resources, including specialised
software as needed.

R3. Over the longer term, the Bank should undertake a thorough review and updating of its
forecasting framework, including replacing or, at a minimum, thoroughly revamping
COMPASS [the Bank’s existing macroeconomic model].

R4. Based on the lessons of recent years, a revamped forecasting framework should include at least the following key elements: (a) rich and institutionally realistic representations of the monetary transmission mechanism, allowing for alternative channels of transmission; (b) empirically based modelling of inflation expectations, with a distinction between short-term (e.g., one-year) and longer-term (e.g., five to ten years) expectations, and without the assumption that longer-term inflation expectations are always well-anchored; (c) models of wage-price determination that allow gradual adjustment and causation from prices to wages as well as from ages to prices; (d) detailed models of the financial sector, the housing sector, the energy sector, and other key components of the UK economy; (e) greater attention to, and ongoing review of, supply-side elements and their role in the determination of inflation and growth. Important supply-side factors include changes in productivity, labour supply, the efficiency of job-worker matching, supply-chain disruptions, and trade policy. Notably, analyses of inflation should consider supply-side factors as well as the state of aggregate demand.

R5. Incrementalism (the practice of basing new forecasts on previous forecasts, with marginal adjustments) and the use of ad hoc judgements may obscure deeper problems with the underlying forecasting framework or unrecognised changes in the structure of the economy. The staff should be charged with highlighting significant forecast errors and their sources, particularly errors that are not due to unanticipated shocks to the standard conditioning variables. Models and model components that may have contributed to forecast misses should be regularly evaluated and discussed, as well as the determinants of variables whose forecasts are consistently dominated by extra-model judgements. Staff
should routinely meet with MPC members to consider whether structural change, misspecification of models, or faulty judgements warrant discrete changes to the key assumptions or modelling approaches used in forecasting.

R6. The Bank should review its personnel policies to determine if existing staff could be deployed in ways that improve the forecasting infrastructure and forecast quality.

R7. To improve the MPC’s policy discussion, the central forecast should be regularly augmented by alternative scenarios, with the specific scenarios ideally decided upon at an early stage of each forecast round by the MPC and staff.

R8. The publication of selected alternative scenarios in the MPR, along with the central forecast, would help the public better understand the reasons for the policy choice, including risk management considerations.

R9. Because the standard conditioning assumptions do not necessarily reflect the MPC’s views but can have potentially significant effects on the forecast, and because the central orecast by itself does not provide a clear rationale for policy decisions, the MPC should deemphasise the central forecast based on the market rate path in its communications and beexceptionally clear in warning about situations in which it judges the standard conditioning assumptions to be inconsistent with its view of the outlook.

R10. To put less emphasis on the central forecast, to simplify its policy statement, and to reduce repetitiveness in its communications, the MPC should replace or cut back the detailed quantitative discussion of economic conditions in the Monetary Policy Summary in favour of a shorter and more qualitative description, following the practice of most peer central banks.

R11. Despite their distinguished history, the fan charts as published in the MPR have weak conceptual foundations, convey little useful information over and above what could be communicated in other, more direct ways, and receive little attention from the public. They should be eliminated. Mean forecasts as currently constructed do not provide additional useful information and should also be dropped from publications in favour of more qualitative descriptions of risks and uncertainty surrounding the outlook.

R12. A phased approach to implementing changes proposed in this report, focused first on improving the forecasting infrastructure, while moving cautiously in adopting changes to policymaking and communications, is likely to be necessary. To facilitate infrastructure improvements and address existing deficits, the commitment of additional resources will be required, at least for a time.

Go here to download the data.

Go here to read the full report.

Read the published paper by Jennifer L. Castle, Jurgen A. Doornik and David F. Hendry here.