Öberg: Monetary policy’s Catch-22 – uncertainty
On Tuesday First Deputy Governor Svante Öberg spoke to invited guests at the Riksbank. Mr Öberg discussed the Catch-22 situation that he believes one faces as monetary policymaker. As monetary policy acts with a lag, it must be based, at least partly, on forecasts. However, the Riksbank’s and other analysts’ forecasting ability with regard to GDP growth and inflation is very limited one year ahead and largely non-existent two and three years ahead.
Mr Öberg therefore argued that the Riksbank should place greater emphasis on analysing the initial situation and on forecasts for the coming year, than on forecasts for years two and three, which should instead be regarded as potential scenarios rather than unbiased forecasts. Correspondingly, Mr Öberg said that greater weight should be given to forecasts for the repo rate over the coming six months than to longer-run forecasts. The level of the repo rate should be checked against other monetary policy frameworks, such as the Taylor rule. The Executive Board should also be clear about the inflation target and what is meant by normal resource utilisation.
Mr Öberg also noted that the basis for monetary policy has improved gradually since the current monetary policy regime, with a floating exchange rate and an inflation target, was introduced. However, he felt that the base needs further development. For instance, the forecasts for resource utilisation should be developed further and accompanied by indications of how uncertain they are. The Riksbank should give greater consideration to credit expansion and asset prices and the forecasts for these variables should be developed, accompanied by accounts of uncertainty and formally integrated into the base for the monetary policy decisions. The models should be developed so that they can handle different repo-rate paths and the uncertainty in comparisons of economic developments with different repo-rate paths should be reported.
Read the whole speech in the PDF file below.
