CNB ends the first phase of its monetary policy review with an international workshop and will now start work on developing a new forecasting model

The first phase of the review of the CNB’s monetary policy analytical and modelling framework has been completed successfully. The CNB brought this phase to a close today with an international workshop attended by top foreign economists led by Claudio Borio, the former Head of the Monetary and Economic Department at the Bank for International Settlements. In the next step, the central bank will develop a new forecasting model to supplement its existing tools. It will also put into practice other recommendations made by domestic and foreign experts who have evaluated the CNB’s past monetary policy. The aim is to enhance the CNB’s analytical and modelling framework so that, among other things, it can better withstand the current environment of unexpected economic shocks.

The CNB is now entering the second phase of its monetary policy review. This will build on the first phase, which the CNB began by having its analytical and modelling framework assessed independently for the first time ever. Based on the experts’ recommendations, it then strengthened the role of research in the Research and Statistics Department and made other organisational changes to prepare the CNB for the key period ahead. At an international workshop in Prague today, CNB representatives presented the steps taken so far and the outlook for the future. They also discussed the way forward with leading foreign economists with experience of monetary policy reviews in other countries.

“Looking ahead, the toughest challenges for monetary policy regimes may well be still to come. For one, the political environment is becoming less conducive to a stability-oriented monetary policy. Over time, a dangerous expectations gap has been developing between what monetary policy can deliver and what it is expected to deliver. But inflation targeting regimes cannot afford to stay still,” said Claudio Borio, the former Head of the Monetary and Economic Department at the Bank for International Settlements, who also attended the CNB workshop.

In the second phase, the CNB will put into practice the recommendations contained in the assessments prepared by expert teams led by Professor John Muellbauer from the University of Oxford, Roman Šustek from Queen Mary University of London and Professor Martin Mandel and Associate Professor Karel Brůna from the Prague University of Economics and Business. These assessments identified deficiencies in the CNB’s current modelling framework and emphasised the need to strengthen the role of economic research at the central bank and to increase the emphasis on the use of available data sources. “Theories and models are valuable to a central bank only to the extent that they facilitate an informed and sufficiently comprehensive debate – one that helps us understand the evolving economic story in the short, medium and long run,” said CNB Deputy Governor Jan Frait. In his opinion, the reviews have shown that the CNB’s current tools cannot fulfil this role to the full.

“We need analyses that are not only technically accurate, but also sensitive to economic, social and political realities – analyses that reflect emotions as well as facts and figures. To achieve this, we should be open to different points of view, be prepared to reassess our positions when major changes occur, and invest in people who are able to come up with new approaches and ideas based on knowledge of cutting-edge economic research,” added Deputy Governor Frait.

The main innovation will be an alternative macroeconomic forecasting model to be developed by the Research and Statistics Department at the CNB. The Department was established on 1 January 2025 through the merger of the Economic Research Division of the Monetary Department and the Financial Research Division of the Financial Stability Department with the then Statistics and Data Support Department. “The CNB is currently an outlier internationally. Most other central banks rely on two or more models for monetary policy purposes, whereas we currently use only one central DSGE model. Where a central bank does have a single model, with few exceptions, it is not a DSGE one,” said CNB Deputy Governor Eva Zamrazilová, giving one of the reasons for supplementing the central DSGE model with another powerful forecasting tool.

The Czech National Bank expects the initial results of the development of the alternative model to emerge before the end of this year. However, according to Eva Zamrazilová, it could take two to three years to complete the entire process, including testing and validation of the proper functioning of the new tool. “We don’t want to rush anything. We will put the emphasis on top quality, not speed, because this is a major step as regards Czech monetary policy,” added Deputy Governor Zamrazilová.

In addition to the development of an alternative model, the monetary policy review will be reflected in practice on other levels, such as research. According to Bank Board member Jan Kubíček, the expert assessments have not only identified problem areas in the existing modelling framework, but are also an illuminating source of inspiration for the future development of the CNB. “Major advancements have been made around the world in the field of analytical instruments. The monetary policy review gives us an opportunity to take them and use them to our advantage,” said Jan Kubíček, adding that via the CNB, all individuals and companies in the Czech Republic stand to benefit from the results of the monetary policy review in the future.

Jakub Holas
Director, Communications Division

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