Economic Analysis in a Central Bank - Models Versus Judgment

Central banks need to have sound systems for acquiring, sharing, and analysing economic and financial data so that they can respond quickly to unforeseen developments and steer monetary policy to achieve its objectives. Does this analysis have to rest largely on judgment, or can mathematical models of the economy be used to improve the process? In particular, as policy has to be set in relation to the future development of the economy, can models be used to forecast its course? This paper aims to explain the various types of models which central banks may use, and the advantages and disadvantages of each type. The overall message of the paper is that, when sufficient data are available, central banks should make some use of econometric techniques and of models to improve their understanding of how their economy works and to make forecasts. But these techniques should be used to support good economic analysis, and not as a substitute for it. This handbook is also available in Russian and Spanish.