The Bank of England's BEQM
model, which was still a research project in 2002, is now in active use as a policy tool.
model and such sources as the Bank of England Inflation Report use a slightly narrower definition of investment than we use in our analysis.
We have worked hard at ensuring that BEQM does well in this dimension, but we have also, within our suite, been developing more statistically based models.
The motivation for the BEQM project was to help with the intellectual framework role of the forecast.
BEQM is a large-scale model by the standards of most academic research, but it is small scale compared with traditional macro-econometric models.
BEQM has features that allow us to accommodate such questions when we are forecasting--but in a more ad hoc way that requires a substantial degree of judgement.
These were repeated in the Bank's recent paper describing its new quarterly model, BEQM (2005).
Similar results emerge from the simulations conducted by the Bank on BEQM. The Bank reports that a 1 percentage point increase in interest rates maintained for four quarters affects CPI inflation slowly, with its maximum effect occurring after eighteen months and the effect disappearing after just over three years.
This suggests that the exchange rate channel is also important in BEQM.
The centrepiece of this is BEQM, which has only recently been completed and largely replaces the various disparate models first used.