From a policymaking perspective, data collection, processing and statistical methods are a way to produce evidence for better decision making. A central bank that operates in a forward-looking environment, dealing with a large number of unobservable concepts, has an ultimate responsibility to use all the relevant information at hand. Monetary policy making is not a bureaucratic procedure, but an intense exercise of judgment. Of course, we must be able to share such information and judgment with the public to make our decisions easier to understand. As for judgment, a major challenge for central banks is to connect incoming information with medium-term prospects. While central bank boards generally meet at regular intervals, they need to assess when accumulated information is sufficient to indicate a change in the medium-term scenario, possibly demanding a change in the trajectory of monetary policy. In the case of emerging countries, FX pass-through poses a major challenge, as currency parities may exert substantial pressure on inflation in the short run, gaining a lot of public attention, but they may not prevail in longer spells. The source of currency volatility and the exposure of economic agents to FX risk are key factors that, in our experience, may help assess the medium-term impact of exchange rate movements and condition the need for a monetary policy response. A similar challenge to the exercise of judgment by central banks is to distinguish between “normal” times and stressed scenarios.
True, some of them had to do with political change and policy uncertainty to the heart of the developed world, but on top of that, major empirical and theoretical puzzles are challenging central tenets of monetary policy. In particular, inflation appears not to be responding to monetary policy as expected in advanced economies. Despite record- low interest rates over many years and massive liquidity injections by central banks through asset purchase programs, inflation has not picked up as expected. Explaining the apparent unresponsiveness of inflation has become a theoretical and empirical challenge that has drawn great attention from academia and policymakers in the last couple of years. Inflation dynamics and the way they interact with other economic variables are, of course, crucially important to central banks that have price stability as their core mandate. Most of them currently deliver on this mandate under a forward inflation targeting framework, whereby the stance of monetary policy seeks to achieve convergence of forecasted inflation to the target over a medium-term horizon. This prevents central banks from having to respond to short-term price volatility, but if inflation does not respond to monetary impulses as predicted by models, policymaking may become a much more complex game. If price responses get delayed in a highly accommodative environment, financial imbalances may build up, fiscal discipline may be eroded and inflation risks may get underpriced by markets, exposing themselves to reversals with data surprises in the future.