bank's forecasts are systemically poorer than those of other forecasters, then this is obviously an indication that it would have been possible to make better assessments than those made by the central bank. this also means that better information was available which the central bank would have been able to use as a basis for its decision - making. it is important to remember, however, that the preconditions governing forecasting at a central bank differ somewhat compared to those for many other forecasters. for the central bank it is not enough that the forecasts are accurate. this is one very important quality, but there are others. it must be possible, for example, to understand the driving forces behind the forecasts – why does the forecast look the way it does? how is the forecast affected by changes in assumptions regarding, for instance, demand abroad or the oil price? the central bank also needs a forecasting apparatus that can effectively investigate the consequences of an alternative monetary policy. for the riksbank, which publishes it own interest rate path, this is extremely important. to put it more technically, the central bank must use so - called structural models to assess the consequences of various policy rate paths, while other forecasts can mainly be produced with the help of statistical models alone. normally, there uncertainty and the revisions of gdp figures and other data make forecasting more difficult and also make it more difficult to evaluate the forecasts. are good reasons for believing that structural models provide poorer forecasts than statistical models. however, the riksbank's main structural model, ramses, has very good forecasting properties. 4 when making historical comparisons between the forecasts of central banks and those of other analysts, we also face a number of other difficulties. the first is that it is not certain that the central bank's forecasts are based on what the bank really believes is the best forecast of the policy rate and other variables. for a long time, the riksbank, for example, based its forecasts on the assumption that the policy rate, that is the repo rate, would remain unchanged during the forecast period. some central banks base their forecasts on both a constant interest rate and a constant exchange rate, which are often completely unrealistic assumptions. in such cases, the forecasts for inflation and the real economy are of course not the best forecasts. for a while, the riksbank instead used the assumption that the repo rate would follow the market '

an evaluation of ten years of monetary policy in new zealand on behalf of the country's minister of finance in 2001 and an evaluation of monetary policy in norway as chairman of norges bank watch in 2002. 1 evaluations of monetary policy are thus important and appear to be becoming common practice. one must therefore ensure that reasonable principles and appropriate methods for evaluations are developed and applied. this is what i intend to talk about today. what should we consider when we evaluate monetary policy? what are the principles for a good the evaluation of monetary policy in new zealand and norges bank watch 2002 are available on my website : www. larseosvensson. net. evaluation of monetary policy and what is practically possible? how can principles and practice be developed compared with how evaluations are carried out today? here i present a number of preliminary proposals for such development. why not just examine whether inflation deviates from the target? an increasing number of central banks focus their monetary policy on achieving an inflation target. my discussion today will therefore be about evaluations of monetary policy with an inflation target. given this, you may ask why an evaluation of monetary policy should be so complicated. when there is an inflation target, is it not simply enough to compare the actual outcome for inflation with the inflation target ; that is to evaluate monetary policy after the fact? there are at least two circumstances that make such an evaluation inadequate. unforeseen shocks affect outcomes first, monetary policy does not provide complete control over inflation. a central bank is therefore unable to ensure that inflation will be exactly on target at every point in time. in actual fact, monetary policy is conducted under conditions of great uncertainty. our knowledge of the economic situation is not complete, and neither is our knowledge of how monetary policy affects inflation and the real economy, the so - called transmission mechanism. there is a considerable time lag before monetary policy measures have an impact on inflation, and the duration of this time lag also varies depending on the circumstances. this impact is normally gradual and becomes apparent over the course of a couple of years. as monetary policy works with a time lag, it is most effective if it is based on forecasts. in order to achieve an inflation rate of two per cent, it is therefore best to set the policy rate so that the inflation forecast a couple of years ahead corresponds to the inflation target. however, during the time it takes for changes in the interest rate to have a full impact on inflation the economy will be