Of course, expert judgment and shortterm analyses still play an important supplementary role in the design of the final forecast. The good standard of our current forecasting know-how is reflected, among other things, in our ability to start providing technical assistance in the forecasting field to some other central banks in transition and emerging market economies. It is clear that the development of the forecasting system has not always been straightforward and easy. During the first years, many of the details were adjusted in response to the changing needs,  2  BIS Review 40/2006  challenging experience and evolving thinking of the central bank. Given the legacy of the communist period and the lack of available data, we were forced to leave out, unfortunately or fortunately, the period of large-scale econometric models. First, there was no experience with that kind of modelling in our communist history. Second, the reliable data series start in 1994, which significantly constrains the proper use of econometric techniques. Therefore, our macro models have relied heavily on calibration. Despite, or maybe because of, the latter, they seem to provide consistent guidelines for policy decision-making. The entry of the Czech Republic into the European Union in May 2004 has not so far created any serious issue in respect of the practical forecasting of the Czech economy. However, we can identify two issues related to the future development of the forecasting system.
Well, you all well know that Milton Friedman was rather sceptical about our ability to avoid serious mistakes in this very area and that led him towards the formulation of a “simple rule” of constant growth of the money stock. In this framework no forecasting was required. Of course, he faced evidence of the failure of the large-scale econometric models that had been used in the 1950s to 1970s and that were later subject to strong criticism. The models were hit by a series of structural breaks, which made the previously observed relationships unreliable. Consequently, it was argued that these breaks were not a result of bad luck only, but also reflected a lack of microeconomic foundations in the models, neglect of forward-looking expectations and ad hoc econometric restrictions. The terms “Lucas critique” and “Goodhart law” have become standard warning signs for all macroeconomic modellers. The actual way in which forecasts are produced and used at central banks has, however, changed substantially over the past two decades. The changes have reflected developments both in the economic (and econometric) theory and in monetary policy regimes. Bearing in mind the failure of large-scale models, the profession has started to prefer smaller-scale models with a sounder microeconomic background, built in recent decades usually along the lines of New Keynesian Economics. As the first generation of these new models matured, though, the second generation started to become more detailed again.