Do Central Bankers use Economic Analysis?

Beatrice Cherrier

Economists have recently exhibited considerable anxiety regarding their influence on policy-makers and citizens. While historians point to the pervasive character of economists’ tools and concepts, from cost-benefit to efficiency and mechanisms, economists feel that the conclusions of their models are increasingly ignored. Yet their attempt to promote more efficient and clear ways of writing and new dissemination channels often rely on a linear view of the academia-policy pipeline, where battles get fought within academia and “winning” idea and models are then exported into the policy realm.

Our research project, under Rebuilding Macroeconomics’ Macroeconomic Institutions Hub, hypothesizes that rather than a one-way street from academia to policy, economic models are developed in a two-way street between academia and policy institutions. Understanding how this two-way street operates may have important consequences for the ideas and policies which emerge.

Among policy-making bodies, central banks have received considerable attention. Indeed, they stand at the confluence of several forces: the economic context, parliaments and governments attempting to shape central bankers’ mandate, businesses and citizens’ demands, financial market innovations, and academic debates over theories, models and methods.

Central banks around the world, from Peru to New Zealand, from the USA to Japan, have developed more that 18 DSGE models since 2008. Reciprocally, the number of scholarly articles published in major monetary and financial economics journals with at least a central bank economist coauthor has risen from less than 20% in the 1980s to more than half today.

Central banks’ decisions and associated communication are scrutinized throughout the world. And yet, there is no consensus on the scope and nature of academic macroeconomics’ influence on monetary policy. Are the models maintained by central banks mere signaling that decisions are ‘science-based’, or do they actively shape monetary policy discussions? Are the decisions of central bankers more affected by narratives, charts or analogies rather than theories or models? Are in-house economists schizophrenic, using different forecasting techniques in their brief notes and academic papers? Do central bankers’ agenda weigh on academic macroeconomic knowledge?

The Bank of England (BoE) stands out as particularly entrepreneurial in the type of research papers it publishes, with strong stances taken on financial regulation (in particular on structural reform of banking), distributional effects of quantitative easing, central bank digital currencies or climate change. It also fosters methodological innovation, as exemplified by Andy Haldane’s interest in agent-based modeling. Yet, how this stance results from the interaction between monetary thinking and political and regulatory contexts has not garnered much attention.

It is not clear to what extent the macroeconomic policies the BoE implements, or the macroeconometric models its economists rely on for forecasting, simulation and policy analysis, substantially differ from those implemented in other central banks or taught in departments of economics. In this project, we thus propose to combine quantitative analysis, semi-structured interviews and archival evidence to assess the state of the knowledge produced by BoE economists, their background, networks, influences and impact, and to track the historical roots of their underlying modelling culture back into the 1970s to 2000s.

First, we will mine a database of 3000 documents produced by the BoE since the 1970s to identify patterns and trends in vocabulary and topics, map its positive and normative discourse on financial regulation, “green” monetary policy and inequalities, and compare those results with those obtained for the European Central Bank. How much the BoE public discourse draws on economic analysis will be investigated through archival research, interview, and network analysis.

We aim to understand which modeling culture and storytelling in-house BoE economists have developed, in particular on transparency, credibility, acceptable budget deficits, and monetary vs tax policy. We will research how in-house economists endorsed the London Business School model in the 1970s, developed the BEQM (Bank of England’s Quarterly Model) in the 1980s, then switch to other models. We will track how key ideas, such as Too-Big-to-Fail, efficient markets, wealth effects, climate change, digital currencies and others move along the policy pipeline from academic publication to workshops to BoE Quarterly Bulletins to policy briefs to minutes of policy decisions. We will examine how these ideas are transformed along the way, or are halted at some point, thereby creating a divorce between experts and decision makers.

We will also profile BoE staff economists, through documenting their academic and public service backgrounds, and whom they engage with and quote from in their academic vs policy work. Have some universities taken over the training of monetary economists in the past decades?  Has the 2008 crisis brought new relations with civil society groups and NGOs? Answering these questions will help economists and citizens alike gain a better understanding of how the knowledge produced by economists affect societies and is affected by public demands. Finally, we will provide online access to our cleaned database of BoE document and economists to allow further research.

The co-investigators on this project are: Juan Acosta (University of Los Andes), François Claveau (University of Sherbrooke & CIRST, UQAM), Clément Fontan (UCLouvain) and Aurélien Goutsmedt (Duke University).