Macroeconomic modelling and Monetary Policy in the UK
Submitting InstitutionQueen Mary, University of London
Unit of AssessmentEconomics and Econometrics
Summary Impact TypeEconomic
Research Subject Area(s)
Economics: Economic Theory, Applied Economics, Econometrics
Summary of the impact
George Kapetanios's research on macroeconomic modelling and forecasting
both the operational practices of the Bank of England and its conduct of
UK monetary policy.
His work has:
- led to the creation of novel forecasting tools that have been adopted
by the Bank to
inform the Monetary Policy Committee on macroeconomic trends,
- enabled the Bank to extract information from ONS macroeconomic data
effectively by producing estimates that correct for deficiencies in
early ONS releases,
- informed the Bank's decision to adopt quantitative easing by
estimating the effects of
this policy on GDP growth and inflation, and provided the main source of
support for the effectiveness of the QE policy in the UK during the
A central bank will be able to target inflation effectively only if it
can produce accurate
macroeconomic forecasts based on high-frequency data and extract useful
uncertain signals. These capabilities are all the more necessary when the
resorts to unconventional measures, such as the quantitative easing policy
financed by central bank money) adopted in the UK in the aftermath of the
Kapetanios's research on macroeconomic modelling and forecasting has made
contributions to the above aspects of monetary policy, including:
- development of a suite of statistical models, based directly on
(see reference #3 in Section 3 below), that has improved the Bank of
ability to forecast macroeconomic variables;
- introduction of methods to deal with uncertainty in data releases by
the Office of
National Statistics (ONS), allowing more useful information to be
underlying research (see reference #1 in Section 3 below) employs a
approach that quantifies the uncertainty in ONS data releases resulting
measurement errors and estimates the true values of the economic
- analysis of the effects of quantitative easing (QE) on the UK economy
autoregression models (see reference #6 in Section 3 below). These
the macroeconomic impact (in particular the effects on GDP growth and
of the drop in government bond spreads associated with QE asset
References to the research
- A state space approach to extracting the signal from uncertain data.
Cunningham, J. Eklund, C. Jeffery, and V. Labhard.) Journal of
Economic Statistics 30(2):173-180, 2012.
- Estimating time variation in measurement error from data revisions: an
application to backcasting and forecasting in dynamic models. (With T.
Journal of Applied Econometrics 25(5):869-893, August 2010.
- Forecasting using Bayesian and information-theoretic model averaging:
application to UK inflation. (With V. Labhard and S. Price.) Journal
of Business and
Economic Statistics 26(1):33-41, 2008.
- A real time evaluation of Bank of England forecasts of inflation and
growth. (With J.
Groen and S. Price.) International Journal of Forecasting
- Forecasting with measurement errors in dynamic models. (With R.
Harrison and T.
Yates.) International Journal of Forecasting 21(3):595-607,
- Assessing the economy-wide effects of quantitative easing. (With H.
Stevens, and K. Theodoridis.) Economic Journal
Details of the impact
The Bank of England engages with academia in order to explain current
policy issues and
learn about tools and models that may be useful for addressing them.
process often leads to research projects involving both Bank staff and
the results of which are described in internal publications such as the
These publications, in turn, inform decisions by policymakers at the
Kapetanios was employed by the Bank prior to joining QMUL, and
continues to spend one
day a week there on a permanent basis, so he is well placed to
participate in the interchange
of ideas between academics and policymakers. His research in
collaboration with staff at the
Bank has continued to influence both its operational practices and its
conduct of monetary
policy. The examples of collaborative research described below
demonstrate this impact: in
all three cases, Kapetanios was personally involved in the production of
presented to the Monetary Policy Committee (MPC) to inform and support
1. Macroeconomic forecasting.
Since monetary policy is forward looking, a critical factor for its
effectiveness is the
availability of accurate macroeconomic forecasts. This is especially so,
as in recent years, in
the aftermath of a severe recession.
Kapetanios's research has led to the development of a suite of novel
statistical models that
are routinely used by the Bank to construct forecasts of key indicators
such as GDP growth
and inflation for the Monetary Policy Committee. These models exploit
data and methods not
previously included in the Bank of England Quarterly Model, the
framework for producing official economic projections. For example, the
suite contains linear
and non-linear univariate models whose performance Kapetanios has
compared with official
forecasts (see reference #4 in Section 3 above).
2. Uncertainty in data releases.
Most macroeconomic data are uncertain; that is, they are estimates
rather than perfect
measures of the economic variables of interest. Quantifying and
correcting for this
uncertainty is of great importance for the conduct of monetary policy.
In 2005 Kapetanios was asked by the Bank of England to serve as the
on a team assigned to study biases and other deficiencies in early ONS
releases, and to
propose methods for addressing these issues. This research collaboration
innovative tools for understanding and using uncertain macroeconomic
data, including a
behavioural model of government statistical agencies and an analysis of
between accuracy and recentness of information (see references #2 and #5
in Section 3
above). Bank staff who brief the Monetary Policy Committee regularly use
toolkit to improve their forecasts of macroeconomic trends.
3. Effects of quantitative easing.
After the financial crisis intensified in late 2008, the Bank of
England and other central banks
loosened monetary policy by both conventional and unconventional means.
In the UK, the
principal unconventional policy measure has been the so-called
programme, which has made large-scale asset purchases financed by
central bank money.
Kapetanios has recently coordinated a Bank project aiming to quantify
effects of the QE programme. A variety of vector autoregression models
indicate that the first
round of asset purchases had peak effects of approximately +1.5% on real
GDP and +1.25%
on CPI inflation. These findings have provided the main source of
scientific support for the
effectiveness of the QE policy in the UK during the Great Recession.
Sources to corroborate the impact
The following Bank of England staff members can address the impact of
different aspects of
- Senior Research Advisor — on the suite of statistical models.
- Agent, East Midlands — on the work relating to data uncertainty.
- Research Adviser — on the work relating to quantitative easing.
- MPC Member — on the suite of statistical models.
The following documentary evidence also demonstrates the impact of the
- "Extracting a better signal from uncertain data" (by Alastair
Christopher Jeffery). Bank of England Quarterly Bulletin, 2007 Q3; on
relating to ONS macroeconomic data and its use by the Bank.
- "The United Kingdom's quantitative easing policy: design, operation
and impact" (by
Michael Joyce, Matthew Tong, and Robert Woods). Bank of England
Bulletin, 2011 Q3; on the work relating to quantitative easing and its
use by the Bank.