Wickman-Parak: Translating forecasts into repo-rate decisions - no easy task
On Tuesday, Deputy Governor Barbro Wickman-Parak made a speech entitled “Translating forecasts into repo-rate decisions – no easy task”. She noted that monetary policy must be guided by forecasts and that the best forecasts are produced in interaction between models and assessments. When the time comes to make repo-rate decisions then further assessments are required – assessments that are not always easy to make. One reason for this is that a well-balanced monetary policy, according to Ms Wickman-Parak, must weigh in developments and risks beyond the forecast horizon. Another reason is that it may sometimes be the case that positive and negative deviations from the target have different costs, which also affects the balance of monetary policy. During the financial crisis, the cost of a deflationary spiral, which can be difficult to break, was greater than the cost of a too-high rate of inflation.
It was particularly difficult to translate forecasts into repo-rate decisions during the financial crisis, when the Riksbank and other forecasters made significant forecasting errors. The main problem was that the available models did not capture the international financial links that played such a major role during the financial crisis. It is widely realised that our understanding of these financial links needs to be developed. In conclusion, Ms Wickman-Parak underlined the fact that the lack of a solid forecasting model means that monetary policy must be flexible. During the financial crisis, this flexibility was expressed in terms of a great readiness to substantially revise the forecasts and to change the course of monetary policy. In more normal times, flexibility entails making repo-rate changes gradually. This makes it possible to successively analyse developments and to determine whether to continue to follow the chosen path, to call a halt or to change direction. Sudden changes of course in monetary policy can then be avoided.
Read the speech in full in the PDF below.
