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Targeting inflation under uncertainty: Policy makers' perspective

Kateřina Šmídková

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.

Keywords: Inflation targeting, uncertainty, decision analysis, pay-off matrix

Issued: April 2003

Published as: " How Inflation Targeters (Can) Deal with Uncertainty,' Czech Journal of Economics and Finance, Nos. 7-8, p.316  2005

Published as:  „Targeting Inflation under Uncertainty: Policy Makers’ Perspective", The ICFAI Journal of Monetary Economics, Vol. II, No. 3, pp. 54-95, 2004.


Download  RPN No. 2/2003 (pdf, 570 kB)