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by Beatrice Cherrier
In 2012, Andrew Haldane, who was to become Bank of England chief economist two years later, wrote a VoxEu column entitled “What have the economists ever done for us?” He placed economists “among the guilty parties” for the 2008 financial crisis. At fault were the models lacking credit and financial sectors, called DSGE or New Keynesian models, as well as the type of monetary framework economists advocated on the basis of such models, inflation targeting. With these arguments, Haldane was summarizing the most common criticisms economists faced in the aftermath of the crisis. An underlying assumption of these criticisms is that a single type of model developed within academia has shaped central banking policymaking. Yet, few contributions from the flourishing literature on the science and politics of central banking focuses on which models, and more largely, which economic research, are developed and used within central banks.
We focus on the Bank of England (BoE or “the Bank” hereafter) to excavate its academia-policy pipeline, that is, to document the evolution of the content, status and role of in-house economic research over 50 years. To develop our narrative, we rely on multiple types of sources (including BoE publications, BoE archives, semi-structured interviews with BoE former and current staff) and methods (including prosopography, network analysis, citation analysis, and topic modelling). Our findings challenge the notion that there is a straight and growing pipeline whereby models produced in the academic sphere are imported and applied by central bank economists to drive and legitimate policy decisions, a process sometimes called the “scientization of central banking.” We identify 3 periods in which the development and use of research at the Bank was shaped by economic events, shifts in mandates, policymaking routines and decisions makers’ modeling epistemologies as much as by academic orthodoxies.
It was at the turn of the 1970s that the need for in-house research was increasingly felt at the Bank. The need to build a pragmatic stance toward the ideas spread by monetarists resulted in the hiring of monetary economist Charles Goodhart. A growing desire to build up in-house abilities to forecast inflation, employment and growth as well as simulate the consequence of policy shifts led the Bank to purchase a large scale macroeconometric model from the London Business School in 1976. The next 15 years were largely devoted to improving the modeling of monetary transmission channels, the behavior hypotheses as well as the process whereby the model was estimated. In the 1980s, Economic Division head John Flemming recruited econometricians whose published research on the estimation of such models stood at the academic frontier. Paradoxically, it was the lack of institutional strategy toward a more systematic use of economic research in the decision-making process that allowed in-house economists to pursue their own research agenda, devoid of practical considerations and constraints.
All this radically changed from the early 1990s onward, as the government set up an inflation target that the Bank would be responsible for monitoring through the publication of an Inflation Report and the march toward operational independence. The Bank was reorganized around two wings, Monetary Stability and Financial Stability, with the former becoming dominant. Its analytical work was shaped by the need to provide forecasts for the Inflation Report and analytical input for the meetings of the Monetary Policy Committee, as well as by chief economist then governor Mervyn King’s vision of research: models needed to abide by international academic standards (for instance, through featuring rational expectations), but because of the radical uncertainty decisions-makers were embedded in, the latter needed to rely on a variety of models rather than a single one, as well as on their judgments on economic conditions. What mattered most was not the theoretical or empirical consistency of such models, but their abilities to tell “stories”, consistent narratives about the economy which could be communicated to the public. As research became more embedded in policy-decision routines, thus, a hybrid modeling culture combining academic and policy standards and focusing on monetary analysis was developed.
Research on portfolio adjustments, financial friction, bank balance-sheets and macro- and microprudential regulation was also systematically pursued by the Financial Stability wing, though it only slowly gained attention from the decision-makers after the Bank was stripped of its financial supervision duties in 1997. The 2008 financial crisis led policy-makers to implement new intervention schemes, like Quantitative Easing, independently from in-house research, and to rely more extensively on the research done at the Financial Division in decisions and communications.
From 2013 onward, Mark Carney implemented a “One Bank Research Agenda” that comprised a new institutional space for research – the Research Hub-, greater incentive to pursue academic publications and communicate on research, and a more international recruitment. Chief economist Andy Haldane pushed for the development of new research lines, for instance Agent Based Modeling. The history of research at the Bank however shows that such research only becomes heard once embedded in those policy-making routines shaped by the transformation of the BoE’s mandate, and that a modeling culture combining academic and policy-oriented standards is developed. The BoE academia-policy pipeline is a long and circumvoluted one.