Bernanke urges BOE to highlight alternative paths for economy and policy

livemint.com:

The Bank of England will place more stress on developments that could upend its expectations for the U.K. economy and future interest rates as part of an overhaul of forecasting and communications recommended by Ben Bernanke, a former chair of the Federal Reserve. Published Friday, the Bernanke review is one of the first steps taken by a leading central bank to understand why it underestimated a surge in prices that began in early 2021 and dented living standards.

Bernanke concluded that the BOE performed no worse than its peers in anticipating the inflation surge, and that errors were unavoidable given the size of the shocks that hit economies during the Covid-19 pandemic and its aftermath. “Given the unique circumstances of recent years, unusually large forecasting errors by the Bank during that period were probably inevitable," Bernanke said. However, he delivered a scathing verdict on the bank’s forecasting machinery, concluding that it was deprived of needed resources and judging that the baseline economic model—known as COMPASS—has significant shortcomings and should be thoroughly revamped.

Bernanke said the forecasting process makes the central bank slow to recognize big changes in the economy, such as those that occurred during the pandemic. He recommended that the bank explore alternative scenarios to the most likely path for the economy, both in its forecasts and its communication with the public. This is a practice that has already been adopted by Sweden’s Riskbank.