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Targeting Inflation under Uncertainty: Policy Makers’ Perspective

  • Katerina Smidkova

    (Czech National Bank)

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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File URL: http://128.118.178.162/eps/mac/papers/0304/0304003.pdf
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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
Contact details of provider: Web page: http://128.118.178.162

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  1. 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.
  2. 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.
  3. Laurence Ball, 2002. "Policy Rules and External Shocks," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 3, pages 047-064 Central Bank of Chile.
  4. 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?," NBER Working Papers 8397, National Bureau of Economic Research, Inc.
  5. Leitemo, Kai & Soderstrom, Ulf, 2005. "Simple monetary policy rules and exchange rate uncertainty," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 481-507, April.
  6. 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.).
  7. Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers 56, Bank of England.
  8. 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.
  9. Andrew T.. Levin & Volker Wieland & John Williams, 1999. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 263-318 National Bureau of Economic Research, Inc.
  10. Adrian Pagan & discussant, 2002. "What is a good macroeconomic model for a central bank to use? panel discussion," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  11. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, June.
  12. Simon Hall & Chris Salmon & Tony Yates & Nicoletta Batini, 1999. "Uncertainty and Simple Monetary Policy Rules - An illustration for the United Kingdom," Bank of England working papers 96, Bank of England.
  13. Coletti, D. & Hunt, B. & Rose, D. & Tetlow, R., 1996. "The Bank of Canada's New Quarterly Projection Model. Part 3 , the Dynamic Model : QPM," Technical Reports 75, Bank of Canada.
  14. Robert J. Tetlow & Peter von zur Muehlen, 2000. "Robust monetary policy with misspecified models: does model uncertainty always call for attenuated policy?," Finance and Economics Discussion Series 2000-28, Board of Governors of the Federal Reserve System (U.S.).
  15. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202 National Bureau of Economic Research, Inc.
  16. Srour, Gabriel, 1999. "Inflation Targeting under Uncertainty," Technical Reports 85, Bank of Canada.
  17. 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.
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