DIY Macroeconomic Modelling on a Raspberry Pi

Andrew Blake.

Enthusiasts use the tiny Raspberry Pi computers for many things.  Fun ones include garage door opening, retro gaming, a voice-activated tea maker, live images from near-space and even a GPS kitten tracker.  These computers are primarily educational but do anything a normal computer does, so users also send email, play Minecraft, program and (it turns out) do macroeconomic modelling.

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An estimate of the UK’s natural rate of interest

Mike Goldby, Lien Laureys and Kate Reinold.

The natural rate of interest is usually defined as the one prevailing when economic activity is at potential and inflation is low and stable. As this has a very similar flavour to the monetary policy objective of many central banks, it is interesting to policymakers. The natural rate is unobservable and needs to be estimated. In this post, we show an estimate derived from a standard macroeconomic model which suggests that the (real) natural rate fell very sharply during the financial crisis, perhaps to as low as -6%, and that, despite a marked recovery since 2012, it remains around zero. Continue reading “An estimate of the UK’s natural rate of interest”

How does the scope for policy loosening affect the risk of deflation?

Alex Haberis, Riccardo M Masolo & Kate Reinold

Inflation is currently very low in the UK (indeed briefly dipping into negative territory in April), naturally raising speculation about whether we will experience persistent deflation in coming years. This post illustrates that the probability of deflation is raised further, and the likely duration of any deflation increased, if one thinks that there are limits on how far the Monetary Policy Committee (MPC) could loosen policy in the face of new shocks. We also explore how the current situation differs from other episodes since the crisis when the risk of deflation has been similarly elevated.

Continue reading “How does the scope for policy loosening affect the risk of deflation?”