Bank of England exploring potential of data-led policy making

In outlining its new 'One Bank' research initiative, the Bank said it wants to use "new data, methodologies and approaches to understand household and corporate behaviour, the domestic and international macroeconomy, and risks to the financial system".

The Bank said 'big data' has the potential to inform policy making.

"Future economic actions can be gauged from text sources using natural language processing techniques," the Bank said. "Such analysis could help inform how consumer and financial sentiment evolves. Internet and social media data could also be beneficial for nowcasting. For example, work within the Bank has found that exploiting Google-based queries can improve the nowcasting of variables such as unemployment benefit claims, and car and housing sales."

The Bank said it wants to better understand if transaction data from financial markets could also be "used to help understand broader financial market dynamics and risks", such as "dislocations in market prices, negative feedback loops or spikes in liquidity premia".

In its discussion paper (50-page / 950KB PDF), the Bank also raised the question of whether a central bank like it should issue a digital currency. It said there is "considerable promise" in the "distributed ledger technology" that supports existing digital currency transactions, even though those assets "have economic flaws which make them volatile". It said there would be "economic, technological and regulatory challenges" to overcome if it decided to issue a digital currency.

The regulatory challenges cover "systemic, prudential and conduct" issues, the Bank said.

"The systemic issue is developing the protocol itself, the rules of which govern how a technological system works," the Bank said. "The first question is whether a protocol for a central bank issued digital currency could be developed at all. This would need to engage both the technology and financial sectors as each brings important and distinct expertise. Creating such a system would entail creating a protocol for value transfer over the internet, akin to what Berners-Lee did for information."

"Firms offering digital currency services, such as wallets or currency exchange, would operate on top of the platform, raising the question of how they should be regulated. As they would not be offering to hold funds on their own account, the prudential regulatory issues would probably be different from the conventional focus on capital and liquidity requirements at existing banks. Conduct issues, particularly those relating to know your customer (KYC) and anti-money laundering (AML), would also have to be addressed by such firms. Further research would also be required into how digital identity management could be achieved while balancing privacy considerations," it said.