Analyzing Monetary Policy Reports: A Comparison of FAS and Non-FAS Central Banks

Hello everyone and welcome back to the Better Policy Project YouTube channel. As part of our recent research, we leveraged the capabilities of ChatGPT-4 to delve deep into the analysis of monetary policy reports.

I’d like to draw your attention to a notable achievement from 2022. A working paper was published, penned by David Archer, Martin Gisan, and Douglas Lon. This work laid the very foundations for a pioneering generation of forecasting and policy analysis systems known as FPAS.

For this undertaking, we used CH GPT, a state-of-the-art language AI trained using the text from the paper. This enabled it to learn the nuances and differences between FPAS and non-FPAS central banks.

We chose two central banks for this analysis: the Bank of England, which operates under a non-FPAS framework, and the Reserve Bank of New Zealand, which is an FPAS central bank.

Taking introductions from the latest monetary policy reports of these institutions, we tasked CH GPT with the challenge of comparing them.

The outcome of the analysis was both incredibly precise and deeply illuminating. CH GPT not only succeeded in constructing a report that analyzes these two reports, but it also showcased a keen understanding of their respective strengths and drawbacks.

Let’s delve into the intriguing details of the output generated by CH GPT. On the screen, you can see the report that we created using the output generated by CH GPT.

We color-coded the main ingredients and also highlighted the important parts, making it more obvious for you.

The first part is the analysis of three essential ingredients of FPAS. These are:

1. Where is the economy now?
2. What are the driving forces of the economy?
3. What does the Central Bank do to adjust its instruments to achieve policy objectives?

CH GPT’s analysis revealed that the Bank of England’s report is more descriptive rather than structured, as opposed to the report from the Reserve Bank of New Zealand.

Moving to the second essential ingredient of an FPAS central bank, which is the driving forces of the economy, the analysis showed that the Bank of England’s monetary policy report does not systematically identify or prioritize the underlying forces of the economy. On the other hand, the Reserve Bank of New Zealand’s report hints at key driving factors.

The last question of FPAS, which is the most important one, is about how the Central Bank adjusts its tools to achieve its objectives. The analysis of the Bank of England’s report shows that it does not have a clear structured framework showing how the decisions aim to achieve its objectives. On the other hand, the analysis of the Reserve Bank of New Zealand’s report shows that it connects its policy decisions to its objectives.

The CH GPT analysis also compared these two central banks by the characteristics of FPAS and non-FPAS. The analysis revealed the following:

1. Systematic approach to policymaking: The Bank of England’s report is much less systematic than the one from the Reserve Bank of New Zealand.
2. Communication: The Bank of England has comprehensive communication, but it lacks explicit systematic structure. On the other side, the Reserve Bank of New Zealand uses more direct communications, which better aligns with FPAS.
3. Forward guidance and documentation: The Bank of England’s report does not provide clear forward guidance, while the Reserve Bank of New Zealand’s report provides a clear forward guidance, particularly regarding their policy rate.
4. Endogenous policy rate: The Bank of England emphasizes the bank rate adjustment, which is exogenous and does not provide guidance on how it adjusts its policy to achieve price stability. On the other hand, the Reserve Bank of New Zealand directly references the OCR (policy rate) in relation to its objectives, reflecting the FAS principle.

In conclusion, the analysis conducted by CH GPT highlights the differences between FPAS and non-FPAS central banks. The Bank of England’s report lacks structure and clear guidance, while the Reserve Bank of New Zealand’s report demonstrates a stronger alignment with FPAS principles.

If you would like to read the full report, you can find it here. If you have any further questions or suggestions, feel free to contact us. And don’t forget to subscribe to our YouTube channel. We’ll see you again soon.