much more integrated and global competition has intensified. we need to be part of this globalisation process and not close our doors to it. this is why we have been gradually introducing more competition into previously protected sectors of the economy, such as the financial sector and the telecommunications sector. these are challenging times ahead for us. but as economic recovery gathers pace, it is easy for euphoria to overtake the need for improvement and change. it could also tempt us to scale back or postpone painful restructuring initiatives. but we cannot let this happen. we must reflect upon the boe ’ s financial stability conjecture and outlook, november 1999. lessons of the crisis and use them creatively to strengthen the economic systems, both domestically and internationally. this conference is timely. macro modellers can use this opportunity to do some soul - searching. you can ask yourselves how macroeconometric modelling can facilitate good public policy in this post - asian crisis era. for the critics and the sceptics, the asian crisis is evidence that macro modelling has failed badly. for them, macro modelling is an old millstone in a new millennium. perhaps resources should be freed up for more productive activities? however, the indications are that more and more central banks are embarking on projects to develop macro models of their economies. i take a sympathetic view, and not only because i am addressing a crowd comprised largely of economists and analysts. in my view, macro models can function as good navigational tools for the policymaker. but i must qualify that not all models fit the bill. how macro modelling can remain relevant to policymakers - five qualities i am no expert in the field and my comments today are solely from the point of view of a public policymaker. i believe that macro models must exhibit five qualities in order to be useful to policymakers. first and foremost, macro models must be responsive to structural changes in the economy. otherwise, the macro models will have little or no value for the policymakers who must make hard decisions based on the policy implications of the models. models today have in fact evolved to be quite different from those in the 1970s. then, macro models placed much emphasis on demand - driven outcomes for the economy. that was because governments believed in the power of discretionary monetary and fiscal policies to promote high growth and low inflation. however, the repeated failure of such macro models to identify critical turning points in the 1970s and 1980s caused many economists to question the old assumptions behind the models. it then

peter praet : forward guidance and the european central bank column by mr peter praet, member of the executive board of the european central bank, published on voxeu. org, 6 august 2013. * * * the introductory statement to the press conference following the ecb ’ s governing council meeting of 4 july contained the following two sentences : the governing council expects the key ecb interest rates to remain at present or lower levels for an extended period of time. this expectation is based on the overall subdued outlook for inflation extending into the medium term, given the broad - based weakness in the real economy and subdued monetary dynamics. this statement, in particular the formulation “ for an extended period of time ”, marks a change in the ecb ’ s communication of monetary policy. it is a form of forward guidance, a communication instrument by which central banks convey their monetary policy orientation going forward, conditional on their assessment of the economic outlook. the standard view is that monetary policy influences the economy and, ultimately, price setting primarily by affecting interest rates at intermediate and medium - term maturities. indeed, longer - term interest rates determine the borrowing conditions that are most relevant for a large component of aggregate spending : first and foremost, durable consumption and investment. the expectations theory of the term structure of interest rates suggests that longer - term interest rates reflect the expected path of the very short - term interest rates which the central bank controls. this is because trading in financial markets removes persisting arbitrage opportunities across securities with similar risk characteristics and different maturities. as a consequence, returns are equalised across the term structure, except for premia that remunerate investors holding relatively longer term securities. therefore, it is not so much by changing their very short - term interest rate instruments that central banks can impact the decisions that matter most for the economy. it is rather by influencing expectations about the evolution of those short - term interest rates in the predictable future. when a central bank changes its short - term interest rate, interest rates at intermediate to medium - term maturities tend to shift in the same direction, if there is a signal that the new level of the short - term interest rate is likely to persist1. in general, this puts a premium on the way central banks communicate about, or at least are perceived to reveal their policy orientation. is there evidence supporting the contention that central banks ’ perceived orientation is as important as their actions? answering this question is difficult. first, when a central bank communicate