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. Our current quarterly projection model is a small-scale model belonging to the first generation. It is thus fairly simple and arguably misses many important links in the economy. Nevertheless, it is already quite close to the state-of-the-art among the inflation-targeting central banks around the world, and intense work is in progress to build a higher-generation model. The good standard of our current forecasting know-how is reflected, among other things, in our ability to start providing technical assistance in the forecasting field to some other central banks in transition and emerging market economies. In line with the transparency philosophy of inflation targeting, the Czech National Bank published a book called “The Czech National Bank’s Forecasting and Policy Analysis System” last year. This book describes not only the core forecasting model itself, but also the whole process of creating the final integrated forecast. The model has also been published in a professional journal, the Czech Journal of Economics and Finance. To conclude, I would like to emphasise that the development of our forecasting and analysis system has been part of a wider evolutionary process that the Czech inflation targeting regime has gone through. During the first years, many of the details were adjusted in response to the changing needs, challenging experience and evolving thinking of the central bank.

The terms “Lucas critique” and “Goodhart law” have become standard warning signs for all macroeconomic modellers. As a result, the profession has started to prefer smaller-scale models with a sounder microeconomic background, built in recent decades usually along the lines of New Keynesian Economics. As the first generation of these new models became mature, though, the second generation started to be more detailed again. The recent third generation of models has added the aspect of stock-flow consistency, which has pushed the number of equations even further. The state-of-the-art forecasting models have consequently become quite big animals again, but their philosophical foundations remain very different from those of the 1950s to 1970s, as the third generation has extended the microeconomic foundations considerably. Secondly, the ever-changing world map in terms of monetary policy regimes has also modified the role of forecasting at central banks. In the past, most countries had pegged exchange rates against the major currencies. Under such a system, the role of forecasting is smaller than with the floating exchange rate regime and concentrates on balance of payments analysis and perhaps also monetary analysis. The countries with floating exchange rates, on the other hand, often experimented with money targeting, which pushed monetary analysis to the forefront. However, since the early 1990s the number of countries with floating exchange rates has increased dramatically, reflecting numerous currency crises and a growing consensus on the undesirability of conventional currency pegs. Moreover, the inflation targeting regime has gained much more weight among the group of countries with floating rates.