The surge in inflation seen over the past few years was “unavoidable,” Ben Bernanke said today, as he outlined ways in which the Bank of England could navigate future uncertainty.
Bernanke pointed to the range of global shocks facing policymakers in 2021 and 2022, including the pandemic, the war in Ukraine and the disruption of supply chains.
“Avoiding inflation entirely would have been essentially impossible without throwing the economy into essentially a depression,” Bernanke told MPs on the Treasury Committee.
“Significant inflation was unavoidable,” he added.
Bernanke’s comments came as he was questioned by MPs about his review into forecasting at the Bank of England.
Bernanke, chair of the Fed between 2006 and 2014, was called in by the Bank to lead a review of its economic forecasts after the Bank’s forecasts repeatedly failed to get a handle on inflation over the past few years.
His review found that there were “significant shortcomings” with the Bank’s forecasting, which were partly explained by “material under-investment” in core infrastructure.
“I was concerned by some aspects of the modelling and the software,” he told MPs, pointing to out-of-date software and technology which lacks “important functionality”.
“I don’t really know exactly how some of those problems arose. I do believe that part of the issue was that the Bank was in fact very much engaged in putting out current fires… and they didn’t devote enough time to the maintenance and the updating of the infrastructure,” he said.
“With the staff fully engaged in the production of the current forecast, particularly during periods of extraordinary volatility, insufficient resources have been devoted to ensuring that the software and models underlying the forecast are adequately maintained”.
“Improving that situation is important for the substantive changes in policy and communication that I’ve advocated,” he told MPs.
Bernanke made a range of suggestions in his review. He argued that the Bank’s monetary policy statements were too quantitative in nature, conveying a greater degree of certainty about the future than policymakers could really possess.
He suggested that, in a time of increasing uncertainty, the Bank should make “expanded use of alternative scenarios” to explore the potential impact of differing external circumstances.
“A single forecast is not in itself enough to explain a policy decision… by focusing on one main forecast, the Bank is not as transparent as I would like to be on explaining why it took the rate decision that it did,” he said.
“Expanded use of alternative scenarios would facilitate comparisons of possible policy choices, more accurately quantify the risks to the forecast, and help the committee learn from past forecast errors,” he added.
Bernanke did not recommend that the Bank publish its own rate projection as some other central banks do.
In the committee hearing he noted that there were logistical difficulties preventing the Bank from moving towards an internal rate projection. He also said a central projection formed a “very powerful” form of guidance which sometimes central banks would not want to give.
“I don’t think its a slam dunk,” he said, but still argued that it was “definitely something worth looking at. I’d be disappointed if the Bank did not seriously review the possibility in the next few years”.