1 INTRODUCTION In this chapter we elaborate on the nature of the ‘new consensus’ in macroeconomics and illustrate it by reference to the macroeconometric model of the Bank of England.1 In subsequent chapters we examine the implications of this ‘new consensus’ for both monetary and ﬁscal policy. The purpose of this chapter is to examine the nature of the macroeconometric model, and we do not discuss here the monetary policy regime of the Bank of England even though this macroeconometric model is one of the elements used to forecast economic events on which the Monetary Policy Committee of the Bank of England draw when making policy decisions on interest rates. Inﬂation targeting is the central objective of the Bank of England’s monetary policy, and that has been extensively discussed in the previous chapter. The Bank of England macroeconometric model is, of course, much more complex than the three-equation model (which was used to describe the NCM) approach in the previous chapter. Even the simpliﬁed ‘stripped down’ version of the Bank of England model described below contains more than three equations. There are two features of the Bank of England model relative to the NCM model to which we draw attention. First (and perhaps inevitably), the Bank of England model is an open economy model with equations for the determination of the exchange rate, whereas the NCM model was a closed economy one. Second, whereas the NCM model had a simple Phillips curve type of relationship for price in...
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