Policy-Making and Models at Norges Bank

Abstract

[...] Norges Bank’s macro models have played a key role in forecasting work over many years. Inflation targeting probably places greater demands on our understanding of the way the economy functions than earlier regimes, such as (strict) exchange rate targeting. Developments in economics and computational technology have also provided new possibilities for constructing and solving macroeconomic models. Norges Bank has therefore worked for a while on developing new macro models. The Pilot model was the first step. But this model is very aggregate and the structure is not rich enough to analyse all the issues relevant to an inflation targeting central bank. Therefore we have also started developing a richer model – NEMO. To some extent, this model has already been used. Our Deputy Governor Jarle Bergo illustrated in a speech earlier this year how the model could support the assumption that increased competition has been one of several driving forces behind low inflation. But this model is the topic of a presentation later today. 15 Macroeconomic models are useful tools that can combine our empirical and theoretical insights. But models cannot provide definitive answers to all the questions that we as decision-makers face on a daily basis. Nor can they eliminate the uncertainty surrounding economic developments.[...]