The Bank of England Macroeconomic Model: Its Nature and Implications

:The Bank of England’s report on its approach to macroeconomic modeling reveals the underlying structure of their macroeconomic model used for policy purposes. A simplified representation of the Bank of England model is presented, which is less disaggregated than the original model and focuses on the “long run” relationships. Following current econometric practice, the Bank of England generally estimates long-run steady-state relationships that have embedded short-run dynamics and error correction mechanisms. It is argued that the Bank of England has adopted an essentially endogenous view of money. The model is used to explore the effectiveness of the use of interest rates for the control of inflation and the implications of the macroeconomic model for monetary policy and its channels of influence throughout the economy.