The economy needed a new nominal anchor in order to return to a disinflation path. Inflation targeting was chosen as “the best of all bad” alternatives at the time. Such a sudden switch from a fixed exchange rate system to inflation targeting required a radical and fast change in the central bank’s mentality. This was perhaps the biggest challenge that the CNB had to face. Over the past five years it has involved much work on improving our forecasting tools, leading to substantial development in our internal analytical processes. At the beginning of 2002, the CNB settled on a new forecasting process. This integrates expert judgment and short-term analyses – which were the key pillars of the CNB’s forecasting tool-kit in the first years of inflation targeting – with a macroeconomic model that provides a consistent framework for the policy analysis. An important element of this step was a switch from a forecast with a fixed-interest-rate assumption to an unconditional forecast that includes a reaction function of the central bank. The initially established quarterly projection model was a small-scale model belonging to the second generation of such models. It was thus relatively simple and arguably missed many important links in the economy. Nevertheless, it was already quite close to the state-of-theart among the inflation-targeting central banks around the world, and intense work has been in progress to build a higher-generation model. As a result from July 2008 the CNB’s forecast is based on latest generation general equilibrium model, which is fully based on micro specifications.
Zdeněk Tůma: Forecasting at the Czech National Bank Speech by Mr Zdeněk Tůma, Governor of the Czech National Bank, at the Bank’s Forecasting Dinner, Prague, 18 February 2010. *  *  *  Ladies and gentlemen, dear colleagues, Over the last seven years I have had the privilege to welcome you here at the premises of the CNB and open the Forecasting Dinner with my thoughts on forecasting and related issues. Unsurprisingly tonight it won’t be any different. However, as it is almost certain that this is my last chance to speak to such distinguished audience still as the governor of the Czech National Bank, I would like to use this opportunity and discuss the forecasting process in the Czech National Bank from a little bit broader perspective. Those of you who were expecting exact inflation and GDP growth numbers I will kindly ask to refer to our latest Inflation Report that was published last Friday. As many of you well know it is generally recognised that central bank policies must be forward-looking. As emphasised by Milton Friedman, for example, there are long lags between monetary policy actions and their impact on the economy.