It also serves to guide expectations of future monetary policy actions, thus making the central bank more effective in fulfilling its duties. For this reason, the quality of the forecasts is crucial not only under reputation aspects but also for reasons of policy effectiveness. As a result, central banks have a natural interest in applying the best forecasting methods available.
This necessitates to continuously incorporate the latest academic developments in forecasting into the models used by economic and research departments at central banks. In my following remarks, I shall discuss some of the recent developments. 1  A rough benchmark for the euro area is that monetary policy affects output in about a year and inflation in about two years.