Bowler hats and umbrellas at dawn — it’s a Bank of England spat (maybe) .
Former Monetary Policy Committee hellion David Blanchflower writes in his latest Bloomberg column:
During my time on the Bank of England’s Monetary Policy Committee, which makes quarterly economic prognoses, Governor Mervyn King controlled the hiring and firing of the forecast team, who did his bidding. They had to produce a result that was consistent with King’s views, or else they would be history. A patchwork of arbitrary fixes and prejudices frequently drive forecasts, which for the uninitiated are hard to see.
King always emphasized the importance of top-down judgments, which means you can just make stuff up as you go along. Worryingly, this was often only loosely based on the workings of the real world. Such glorified guesswork operated reasonably well during the boom years, but failed miserably when the recession hit. To put it bluntly, it isn’t that hard to manipulate a forecast. I have seen it done.
The FT’s economics editor, Chris Giles, doesn’t think that’s much of a big deal.
And he would know, having broken news that the UK’s independent Office for Budget Responsibility wasn’t actually all that independent. It fiddled forecasts — changing estimates for how many jobs would be lost under the UK government’s emergency budget, and sparking Blanchflower’s latest column.
Anyway, Giles reckons the BoE behaviour outlined by the former central banker isn’t quite as bad as what went down at the OBR. Writing on the FT’s Money Supply blog:
These comments will annoy the Bank. Danny’s remarks usually do. But I don’t really see a particular problem either with them or with the Bank’s actions. Of course forecasts are fiddled. The models should be seen as imposing consistency constraints on economists, not on forcing them to hold a particular view about the future.
Call us naive, but doesn’t fiddling the stats do just that — force one particular view on the world (if not the economists themselves) ? If a powerful central banker were to— say — stake his reputation on the idea that inflation consistently above target was just ‘temporary,’ wouldn’t that provide enormous incentive for him to ‘impose’ his own particular perspective? Just a thought of course (whistles).
But on the plus side . . .
With forecasts like the above, it seems unlikely the BoE is really restricting itself anyway.
Related links:
UK Monetary Policy – How Long Should “The Song Remain the Same”? – Andrew Sentance, BoE
Why is CPI inflation so high? – Paul Fisher, Bank of England
If a central banker screams in a forest… – FT Alphaville
Sticky inflation, redux - FT Alphaville