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Targeting Inflation under Uncertainty: Policy Makers' Perspective

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  • Katerina Smidkova

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.

Suggested Citation

  • Katerina Smidkova, 2003. "Targeting Inflation under Uncertainty: Policy Makers' Perspective," Research and Policy Notes 2003/02, Czech National Bank, Research Department.
  • Handle: RePEc:cnb:rpnrpn:2003/02
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    References listed on IDEAS

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    6. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, pages 1111-1146.
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    15. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, pages 605-631.
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    Citations

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    Cited by:

    1. Roman Horvath, 2008. "Asymmetric Monetary Policy in the Czech Republic?," Occasional Publications - Chapters in Edited Volumes,in: Katerina Smidkova (ed.), Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007, chapter 9, pages 117-130 Czech National Bank, Research Department.
    2. Martin Cihak & Katerina Smídková & Ales Bulir, 2008. "Writing Clearly; ECB’s Monetary Policy Communication," IMF Working Papers 08/252, International Monetary Fund.
    3. Roman Horvath, 2008. "Asymmetric Monetary Policy in the Czech Republic?," Occasional Publications - Chapters in Edited Volumes,in: Katerina Smidkova (ed.), Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007, chapter 9, pages 117-130 Czech National Bank, Research Department.
    4. Kateøina 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.
    5. Miao, Jianjun, 2006. "Competitive equilibria of economies with a continuum of consumers and aggregate shocks," Journal of Economic Theory, Elsevier, pages 274-298.

    More about this item

    Keywords

    Inflation targeting; uncertainty; decision analysis; pay-off matrix.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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