Models and assessments complement one another Let me briefly describe the forecasting process at the Riksbank. 4 The Riksbank uses both models and expert assessments in its forecasting work. The picture of the forecasting process that I had before I came to the Riksbank was one where data are fed into complex models which then spit out forecasts. This is of course incorrect. The Riksbank works hard to spread the impressions we gain at the many international meetings we regularly attend. We also carry out our own company interviews to try to capture development tendencies before they become visible in the statistics. Models are necessary to put together the whole picture of the analysis and are often used to simulate what various risk scenarios might entail for inflation and monetary policy. But they do have their limitations and the analysis must also take into account information beyond what the models can handle. One model that is known outside of the Riksbank is Ramses, which is a variant of the dynamic stochastic general equilibrium models that have become popular in the central bank world. 5 Ramses is an internally consistent model of how the economy as a whole fits  3  By risk I mean here the weighing together of the probability that something will occur and the consequences of its occurrence. 4  For a more detailed description of the forecasting process, see the speech entitled “The monetary policy decision-making process” by Irma Rosenberg, June 2008.
Moreover, proposals are presented both for the repo rate decision at the next monetary policy meeting and for the forecasted repo rate path. These proposals normally reflect the stance the Executive Board usually takes with regard to inflation and resource utilisation. They are thus based on historical relationships between the Executive Board’s decisions and the development of the economy. 7  6  However, one should bear in mind that forecasting work is actually a continuous process. Even between the forecasting rounds, we often analyse the international economy and the Swedish economy for reasons other than to make forecasts. For instance, background reports are written prior to Executive Board members taking part in international meetings, in which both economic activity and economic policy are discussed. 7  The reason for the proposal being based on the Executive Board’s historical behaviour rather than on the staff’s perception of what constitutes a well-balanced monetary policy is discussed by Hallsten and Tägtström in the article “The decision-making process – how the Executive Board of the Riksbank decides on the repo rate” in Sveriges Riksbank Economic Review no. 1 2009 (p. 78). 4  BIS Review 65/2010  If we members of the Executive Board consider that there are any special risks that should be examined, then simulations and sensitivity calculations are made for alternative scenarios. Simulations are also regularly made with regard to illustrating the effects of conducting an alternative monetary policy.