The Role of Science – Abstract


Lars E.O. Svensson
Princeton University,

First draft: March 2006

There is a considerable amount of science in current best-practice monetary policy. But a considerable amount of judgment is needed, too. There is no way best-practice monetary policy can rely on models alone. The current monetary-policy setup by Norges Bank, the central bank of Norway, provides an example of best-practice monetary policy. The bank decides on an optimal instrument-rate plan that results in inflation and output-gap forecasts that are deemed to best achieve the bank’s objective. The instrument-rate, inflation, and output-gap forecasts are published and extensively motivated and discussed. The framework, which can be described as “forecast targeting,” implies that judgment is used in a systematic and disciplined way.

JEL Classification: E42, E52, E58

Keywords: Forecasts, flexible inflation targeting, optimal monetary policy.