By Simon Lloyd, Andre Moreira and Jan Zacek
Dr Bernanke’s 2024 review was an important catalyst for developments to the toolkit built and used by Bank staff to inform MPC decision-making. To incentivise model development and support the ongoing Monetary Policy Transformation Programme, we established the Macro Technical Paper (MTP) series to document models and conceptual frameworks that underpin monetary policy analysis. Alongside this, we have also established a series of Macro Modelling for Monetary Policy fora, where external experts – from academia, other policy institutions and the private sector – discuss MTPs to support continuous improvement and learning via rigorous debate.
Building on the success of the first forum at the National Institute for Economic and Social Research in July 2025, the second event was held in Leeds on 1 April 2026, featuring five MTPs. Across all sessions, a unifying discussion theme was the use of models in practice. Speakers agreed that models are not to be used mechanically or trusted as a single source of truth, but as complementary organising devices for reasoning, testing narratives and clarifying trade-offs. The MTPs presented exemplified how various modelling approaches feed into the MPC’s policymaking process.
Learning from forecast errors: the Bank’s enhanced approach to forecast evaluation
The event opened with discussion of the technical toolkit underpinning the recent Forecast Evaluation Report, summarised in MTP No. 6, Learning from forecast errors: the Bank’s enhanced approach to forecast evaluation. The paper focuses on the question: when forecasts go wrong, how should forecasting practitioners respond? It introduces an enhanced forecast evaluation framework that is now embedded in the Bank’s regular processes to support more systematic real-time learning from past forecast misses. This framework combines formal statistical tests with insights from economic models to provide a disciplined way to judge when forecast errors stem from conditioning assumptions, data revisions or shortcomings of the models themselves.
Given the large forecast errors observed during the 2022–23 energy crisis, the paper places particular emphasis on inflation forecast misses during that period. Chart 1 shows, according to one model’s estimates, which portion of the inflation forecast errors from the August 2021 Monetary Policy Report (MPR) projection can be attributed to key assumptions about exogenous economic developments underpinning the projection that were not realised. The remaining share is unexplained – potentially reflecting model misspecification, non-linearities, or other factors not captured – and has prompted ongoing improvements to the Bank’s forecasting framework.
Chart 1: Explaining August 2021 MPR projection inflation forecast errors
Footnotes
- Notes: Figure 9 in Abiry et al (2026). The chart shows forecast errors for the August 2021 MPR projection of CPI inflation, and the total contribution from conditioning-path news.
Discussion by both practitioners and academics highlighted three main themes. First, discussants praised the technical quality of the Bank’s new forecast evaluation toolkit – including its accompanying open-source code, released to improve transparency and encourage technical scrutiny, which had already begun to influence thinking beyond the Bank. Second, discussants stressed the importance of continuous development of this toolkit, as both the literature and the economic environment continue to evolve. Third, some specific opportunities to strengthen the robustness of this approach were also identified – such as incorporating further small-sample testing methods.
A global-to-UK SVAR
Global shocks play an important role in shaping UK macroeconomic outcomes, reflecting the UK’s deep integration into the global trade and financial systems. Understanding and distinguishing these external drivers is critical for policymaking – particularly in an environment of heightened global uncertainty. The global-to-UK structural vector autoregression (SVAR) model, to be documented in a forthcoming MTP, is motivated by this need. The framework, which builds on a preexisting UK-focused SVAR, interprets the implications of global developments for the UK economy by disentangling global demand, supply, energy, US monetary policy, and financial shocks. It provides a structured lens through which international forces can be mapped onto UK economic developments. In practice, Bank staff plan to use this tool to inform narratives around global spillovers, contextualise recent inflation and growth outcomes, and generate historical decompositions that can shed light on the relative contributions of domestic and external forces.
For example, Chart 2 illustrates how the model decomposes movements in UK inflation and GDP growth over the global financial crisis of 2008–10. Alongside a range of other global and domestic shocks, the results show that global financial shocks played an important role in explaining the dip in inflation and deep recession in the UK.
Chart 2: Shock decomposition over the global financial crisis based on the global-to-UK SVAR model
Footnotes
- Notes: Bank calculations to be included in Cesa-Bianchi et al (forthcoming). The chart shows contributions of different SVAR-identified shocks to annual CPI inflation and year-on-year real GDP growth.
Discussion highlighted the policy relevance of this work. Participants noted that global financial and energy shocks appear to play a significant role in driving UK fluctuations and welcomed the use of historical decompositions to interpret macroeconomic developments. Ahead of publication, discussants encouraged further work on shock identification and on more detailed expenditure channels, such as consumption and investment, to better understand how global shocks propagate through the domestic economy.
A UK-HANK model
The latest MTP No. 7, A UK-HANK model, expands the Bank’s macro modelling toolkit, incorporating household heterogeneity, housing, and balance-sheet channels. Compared to more conventional models, this provides a more complete framework for understanding how monetary policy actions and economic shocks propagate through the economy. While heterogeneous-agent New-Keynesian (HANK) models have been explored extensively in the academic literature, this contribution brings those advances into a policy setting, translating frontier research into a tool that addresses important questions faced by monetary policy makers.
In practice, the model can be used as a laboratory for scenario analysis, helping policymakers understand how different households respond to policy changes and economic shocks. This makes it especially valuable for scenarios involving housing markets, financial conditions, or fiscal-monetary interactions, and the framework has already been used to inform a weaker-demand scenario in the November 2025 MPR. The rich model structure also offers new insights into monetary policy transmission. Chart 3 illustrates this by unpacking how a Bank Rate increase propagates through the economy. It shows that the largest share of the overall GDP impact operates through the expectations channel, followed by sizeable effects via the exchange rate, housing, and cost of capital channels.
Chart 3: Decomposition of the GDP response to an unanticipated monetary policy shock in the UK‑HANK model
Footnotes
- Notes: Figure 4 in Albuquerque et al (2026). The figure shows the GDP response to a one percentage point unanticipated monetary policy shock and decomposes it into partial‑equilibrium channels.
The discussant described the model as both ambitious and highly policy‑relevant, praising its ability to address scenario‑based questions involving housing and balance sheets. Suggestions for future extensions included richer modelling of mortgage rate pass‑through, greater heterogeneity in labour‑income responses, and the explicit incorporation of energy prices.
Tools for endogenous monetary policy analysis: optimal projections and instrument rules
The presentation on MTP No. 4, Tools for endogenous monetary policy analysis: optimal projections and instrument rules, gave an overview of several approaches used to explore alternative policy paths around a given forecast or scenario. These alternative policy paths have been incorporated into MPRs since November 2025. By generating optimal policy projections (OPPs) or simple rules-based paths, these tools allow staff to assess how different policy responses to the same outlook might affect inflation, activity, and interest rates over time. In practice, they help clarify policy trade-offs, test state contingency, and support communication within the policy process. Rather than providing precise policy recommendations, they complement the baseline forecast and scenario analysis by illustrating how outcomes differ under alternative policy strategies.
As an example, Chart 4 demonstrates alternative policy paths and outcomes around the February 2023 forecast using the toolkit. In this example, the baseline forecast (shown in the aqua lines) includes the lowest inflation profile, despite a lower short-term level of Bank Rate compared to some of the alternative paths. This is because that baseline is predicated on a market-expectations path for policy that remains tighter for longer. Turning to the alternative paths, the chart shows how a tighter policy stance, as prescribed by the contemporaneous Taylor-type rule when compared with other simple rules (purple line versus gold and orange), would weigh on inflation more heavily at the expense of a more negative output gap. By contrast, a looser Bank Rate path, as prescribed by a forward-looking Taylor-type rule (shown in gold) that ‘looked through’ the near-term peak in inflation, would reduce inflation more slowly but limit the deterioration in the output gap.
Chart 4: OPPs and interest rate rules – February 2023 forecast
Footnotes
- Notes: Figure 3 in Alati et al (2026). The figure plots the OPPs and three instrument rules around the February 2023 forecast.
The discussant highlighted both the usefulness and the limitations of these tools, noting issues related to model dependence and suggesting some further avenues for development of the Bank’s endogenous policy toolkit, for example by exploring alternative assumptions about the expectations formation process.
Monetary policy making under uncertainty
Finally, MTP No. 5 provides a broad conceptual framework to help guide Monetary policy making under uncertainty – exploring how models can be used, and policy set, depending on the level and nature of uncertainties affecting the economic outlook. In day-to-day practice, this paper’s proposed taxonomy of ‘forecast-based’, ‘news-based’, and ‘rules-based’ perspectives can help staff structure policy advice and assess which analytical lens is likely to be most informative in a given environment – where, for example, a conventional ‘forecast-based’ approach may offer the best guide to setting policy when uncertainty is low, but simple policy ‘rules’ based on current economic developments (as opposed to medium-term forecasts) may provide a more robust alternative when uncertainty is both high and hard to quantify.
Rather than offering precise policy prescriptions, this framework is designed to support more holistic policy and robust deliberation by making the role of judgement explicit and encouraging the use of multiple, complementary, perspectives. In doing so, it helps to both make sense of – and to systematise – how real-world monetary policy advice is often prepared, particularly in the aftermath of large or novel shocks.
Discussion highlighted the importance of judgement in bridging theory and practice, especially when uncertainty is deep and evolving. Participants noted that the usefulness of different perspectives depends on the nature of the shocks affecting the economy, and that pluralism in modelling tools should be viewed as a strength rather than a weakness.
Main takeaway: from models to practice
A central message from the forum was that – rather than providing standalone or definitive answers – models are best seen as complementary tools embedded in a holistic policy process where judgement also plays an important role. Taken together, this set of MTPs illustrates how a diverse set of structural models, empirical frameworks, and statistical tools are routinely drawn upon to support robust, transparent, and adaptable monetary policy making.
In the future, we plan to organise more MTP events as our stock of papers continues to grow. For this second Macro Modelling for Monetary Policy Forum, Bank staff would like to thank the University of Leeds for their hospitality, discussants for thoughtful comments, and attendees for their active participation.
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