The Interaction between the Bank of England’s Forecasts and Policy, and the Outturn

There are long, (and often variable), lags between a change in interest rates and its effect on real output and inflation. Hence policy should be based on forecasts, (King 2000). So the eventual out-turn, e.g. for output and inflation, is a complex combination of the skills of the forecaster, the response of the policy-makers to the forecasts (and to their other, possibly private, sources of information), and the impact of shocks which were unforeseen at the time of the forecast. The aim of this paper is to try to disentangle this mixture in the particular case of the Bank of England, and thereby to assess the skills of the forecasters, the adequacy of the response of the monetary authorities, and the time path of shocks which were unanticipated at the time of the original forecasts.