Staff Memo

Monetary policy analysis in practice

Author: By Ragna Alstadheim, Ida Wolden Bache, Amund Holmsen, Junior Maih and Øistein Røisland
Series: Staff Memo
Number: 11/2010

Abstract

Norges Bank is one of few central banks publishing an interest rate forecast. This paper discusses how we derive and communicate the interest rate forecast. To produce the forecasts, the Bank uses a medium-sized small open-economy DSGE model - NEMO. Judgments and information from other sourcesare added through conditional forecasting. The interest rate path is derived by minimizing a loss function representing the monetary policy mandate and the Board's policy preferences. Since optimal policy is vulnerable to model uncertainty, some weight is placed on simple interest rate rules. A weight on the deviation of the interest rate from the level implied by a simple rule is included in the loss function.

Published 28 October 2010 14:59

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