Publishing the interest rate forecast may not be sufficient to communicate the central bank’s reaction function, as one specific forecast does not in itself convey much information about how the central bank responds to various shocks. One could argue that three ingredients are required; 1) the forecasts, 2) how the central bank responds to shocks, and 3) the criteria underlying the forecasts and reaction function. The first two ingredients provide efficiency in monetary policy, in the sense that private agents knowing the central bank’s assessments and reaction function can respond appropriately to economic developments. The third ingredient contributes to a better understanding of the objectives of monetary policy and the link between objectives and policy. This could underpin the credibility of the reaction pattern, and is also important for democratic accountability. In addition, the reaction function could change over time, for example due to a change in how the economy works or an improvement of the understanding of economic mechanisms. The criteria could then give some guidance to the public on how and why the reaction function might change. Let me briefly explain how Norges Bank communicates the three ingredients of our communication, and let me start with the forecasts. Chart 1 shows the forecasts of the key variables. The uncertainty bands are based on model simulations and reflect estimated variances of the different shocks. (Note that there is also a fan chart for historical values of the output gap, since there is also uncertainty about potential output in retrospect.)
This is in line with EBRD Strategy of Graduation and the graduation of EU 8 countries from EBRD operations can be envisaged. The Czech Government has already given approval that discussions with the Bank's management on the graduation of the Czech Republic from EBRD operations can begin. We believe that October 2007 - which would be the date of the regular consideration of EBRD Strategy for the Czech Republic could be considered an appropriate for this debate. This time-frame should be sufficient for the Bank, the Czech authorities and investors to make the necessary arrangements. We understand that the Bank's management will make their decisions regarding the supervision of its portfolio in the Czech Republic, including decisions concerning the future of the Bank‘s representative office in Prague. The mandate of the EBRD in the Czech Republic is thus approaching its conclusion, and I would like to express our gratitude and appreciation to the Bank for its support during the ups-and-downs of the transition process in my country. Our sincere thanks go to the Management and all those numerous members of staff who for years and sometime in difficult circumstances brought many successful projects to the Czech Republic. We wish the Bank much good fortune for fulfilling its mandate. Thank you for your attention. BIS Review 44/2006  1