They also provide a platform for the integration of economic analysis under the second pillar in a coherent and internally consistent way, which seeks to reflect past experience and fundamental economic relationships. Twice a year, the Monetary Policy Committee of the Eurosystem undertakes, with the help of a Working Group on Forecasting, a forecasting exercise which brings together staff from both the ECB and national central banks. The macroeconomic projections produced by these exercises combine analysis based on a variety of econometric models with expert assessments made by staff. The Eurosystem’s staff projections are therefore not the result of the mechanical application of a single econometric model. On the contrary, they combine a variety of different analyses, all of which rely on the staff’s technical expertise. Although they play a useful and important role, the projections are not a panacea. First, they are always based on specific assumptions - such as those concerning oil prices or exchange rates - with which it is possible to disagree or which can change rapidly, so that the projections become outdated. Second, the final projection depends to a great extent on the underlying conceptual framework or techniques employed in its production. Third, by their very nature, economic frameworks can only 3  BIS Review 109/2000  provide a summary description of the economy and thus do not incorporate all relevant information. In particular, some information is not easily integrated into the framework used to produce the projections or may change after they are finalised.

The Governing Council’s own guidepost for the future was published at the outset in the form of its quantitative definition of the ECB’s primary objective. This definition serves a different purpose, namely to anchor inflation expectations. Against this background, the published macroeconomic projections should not, under any circumstances, be seen as calling into question the commitment of the Governing Council to maintaining price stability over the medium term. The public, wage and price-setters, and all firms and households should continue to rely on the ECB’s quantitative definition of price stability as the “best prediction” of medium-term price developments, since the Governing Council is committed to changing monetary policy whenever this is necessary to maintain price stability. The publication of staff macroeconomic projections thus informs the public about an important input into the Governing Council’s decision process, which has already been used in the past. The publication of projections has to be considered in the context of the ECB’s monetary policy strategy. Publication thus changes neither the ECB’s monetary policy strategy nor the role of these projections within it. I am convinced that publication of these staff projections can help to improve the ECB’s presentation and explanation of monetary policy decisions. However, if this is to be the case, the public - and the European Parliament and your Committee - must recognise the limitations of forecasts and projections that I have just described, and the implications these limitations have for the role of staff projections in the ECB’s strategy. 3.