Models, monetary policy (models of central bank policy)

The central bank uses economic models to form a picture of the expected development of the price level. Such models must be as accurate as possible in depicting the interrelationships between the price level, money supply and other factors, such as exchange rates, the introduction of new production processes or changes in the general environment – in the case of the ECB, especially the admission of new participants to the monetary community – on prices. – However, since models are always simplifications of reality, which is meshed in many ways, numerous influencing variables have to be left out of consideration. Which model variables are to be taken into account and with what weight, and which can be disregarded, however, remains controversial. This then becomes a decision-making problem every time different models recommend different monetary policy actions. – See braking path, monetary policy, key data, macroeconomic, Elizabeth question, oil price shocks, equilibrium models, dynamic-stochastic, hurricane shocks, long-lag theory, market risk stress test, model credibility, model uncertainty, shocks, structural, thrift rule, structural uncertainty, Taylor rule, uncertainty, VAR model, word case scenario. – Cf. Deutsche Bundesbank Monthly Report, June 2004, p. 16 f.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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