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Targeting Inflation under Uncertainty: Policy Makers’ Perspective

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Author Info
Katerina Smidkova (Czech National Bank)

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Abstract

Monetary policy makers need to build two pillars for their inflation targeting strategy. Firstly, a methodology for producing the central forecast should be developed, since the whole decision process is more easily organised around a model forecast. Secondly, a methodology for dealing with uncertainties is equally important, because a poor evaluation of uncertainties can significantly reduce the quality of monetary policy decisions. Reflecting the further progress of the methodological debate inside the CNB, this paper aims to provide suggestions to policy makers as to which methods could be used to assess uncertainty during the monetary policy decision process. Suggestions for each stage of the process are summarised in the final chapter. These take into account the findings of surveys of three very distinct sources – the economic literature on monetary policy under uncertainty, the managerial literature on decision analysis, and the real-life strategies of five central banks. The lessons from these three surveys are presented in separate chapters.

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Paper provided by EconWPA in its series Macroeconomics with number 0304003.

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Length: 36 pages
Date of creation: 11 Apr 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0304003

Note: Type of Document - ; pages: 36 . CNB Research and Policy Note 2003/2
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Related research
Keywords: Inflation targeting Uncertainty Decision analysis Pay-off matrix;

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E - Macroeconomics and Monetary Economics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," International Tax and Public Finance, Springer, vol. 6(4), pages 537-577, November. [Downloadable!] (restricted)
    Other versions:
  2. Laurence Ball, 2000. "Policy Rules and External Shocks," Working Papers Central Bank of Chile 82, Central Bank of Chile. [Downloadable!]
    Other versions:
  3. Leitemo, Kai & Söderström, Ulf, 2001. "Simple Monetary Policy Rules and Exchange Rate Uncertainty," Working Paper Series 122, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
    Other versions:
  4. Tiff Macklem, 2002. "Information and Analysis for Monetary Policy: Coming to a Decision," Bank of Canada Review, Bank of Canada, vol. 2002(Summer), pages 11-18. [Downloadable!]
  5. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of simple monetary policy rules under model uncertainty," Finance and Economics Discussion Series 1998-45, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  6. Arturo Estrella & Frederic S. Mishkin, 1999. "Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 405-436 National Bureau of Economic Research, Inc. [Downloadable!]
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  7. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, January.
  8. Stephen Poloz & David Rose & Robert Tetlow, 1994. "The Bank of Canada's new Quarterly Projection Model (QPM): An introduction," Bank of Canada Review, Bank of Canada, vol. 1994(Autumn), pages 23-38. [Downloadable!]
  9. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile. [Downloadable!]
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  10. Athanasios Orphanides, 1998. "Monetary policy evaluation with noisy information," Finance and Economics Discussion Series 1998-50, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  11. Srour, Gabriel, 1999. "Inflation Targeting under Uncertainty," Technical Reports 85, Bank of Canada. [Downloadable!]
  12. Christopher A. Sims, 2001. "Pitfalls of a Minimax Approach to Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 51-54, May. [Downloadable!] (restricted)
  13. J. Tetlow, Robert & von zur Muehlen, Peter, 2001. "Robust monetary policy with misspecified models: Does model uncertainty always call for attenuated policy?," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 911-949, June. [Downloadable!] (restricted)
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  14. Svensson, Lars E O, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," CEPR Discussion Papers 1511, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Simon Hall & Chris Salmon & Tony Yates & Nicoletta Batini, . "Uncertainty and Simple Monetary Policy Rules - An illustration for the United Kingdom," Bank of England working papers 96, Bank of England. [Downloadable!]
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Cited by:
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  1. Kateřina Šmídková, 2005. "How Inflation Targeters (Can) Deal with Uncertainty," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(7-8), pages 316-332, July. [Downloadable!]
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