Macro Inglaterra

Economic models
at the
Bank of England
September 2000 update

Bank of England

Any enquiries about this publication should be addressed to:
Meghan Quinn
Monetary Analysis
Telephone 020-7601 5269
Fax 020-7601 5196
email: meghan.quinn@bankofengland.co.uk

Further copies of this publication are available from:
Publications Group
Telephone 020-7601 4030
Fax 020-7601 3298
email:mapublications@bankofengland.co.uk
The Bank’s Internet pages are at http://www.bankofengland.co.uk
Bank of England, Threadneedle Street, London, EC2R 8AH.

Printed by Park Communications Ltd
© Bank of England 2000
ISBN 1 85730 182 X

Contents

Page

1
1.1
1.2
1.3
1.4

Introduction
Models, policy analysis and forecasting
General characteristics of the macroeconometric modelChanges to the MM
Other models added to the suite

5
5
6
7
8

2

Overview of the macroeconometric model

9

3
3.1
3.2
3.3

The structure of the macroeconometric model
The long-run real growth path
The long-run nominal growth path and inflation
Short-run dynamics and inflation

10
10
13
14

4

Recent changes to the model specification

15

5
5.1
5.2
5.3Simulation properties
Rationale for simulations
Temporary interest rate shock
Exogenous change in a price level target

16
16
17
18

6
6.1
6.2
6.3
6.4
6.5
6.6

Detailed equation listing
Money, financial and wealth variables
Demand and output
Labour market
Prices
Fiscal policy
Income

20
21
27
36
42
54
56

7

Variables listing

59

Bibliography

68

Themacroeconometric model

1

5

Introduction

In April 1999, the Bank of England published Economic Models at the Bank of England, setting
out the economic modelling tools that help the Monetary Policy Committee (MPC) in its work.
That volume included a complete listing of the Bank’s main macroeconometric model (MM), and
outlined the other members of the suite of models used for various aspectsof monetary policy
analysis. It was made clear at the time that neither the MM nor the other models in use should be
thought of as fixed in form or content. Indeed, many aspects of the models are regularly reviewed,
and new approaches to modelling aspects of the economy are continually investigated.
The purpose of this publication is to provide an update of the changes incorporated in the MMover the past 18 months. It provides a written listing of the MM, to accompany the simultaneous
release of the model code in electronic form. At the same time, we reference some other work
within the Bank that has added to the range of models in the suite and that is already publicly
available.
In this section we outline the Bank’s modelling philosophy (set out more fully in the earliervolume), describe the key features of the MM, highlight the main ways in which the MM has
changed since April 1999, and outline some other relevant modelling work. Sections 2 and 3
explain the structure of the MM in more detail. Section 4 outlines the changes to the MM.
Section 5 discusses the MM simulation properties. Finally, Sections 6 and 7 provide a complete
model listing, including diagnosticson estimated equations and data sources.
1.1

Models, policy analysis and forecasting

The MM is the main tool for producing projections of GDP growth and inflation shown in the
Inflation Report. The MM is built around a number of estimated econometric relationships, but
some of the model properties—notably the long-run properties—are imposed in the form of
parameter restrictions fortheoretical consistency. There is a continual need to evaluate and update
various components of the MM. Estimated MM econometric relationships may have broken down
or have changed in some way, so that research is required to investigate the causes and to test
alternatives that may eventually be incorporated in the MM itself.
The Bank continues to use a range of models. Some provide inputs into...