External review of the CNB’s monetary policy analytical and modelling framework

The turbulent past five years – especially the Covid crisis and the subsequent energy crisis – have led many inflation-targeting central banks to consider making changes to the conduct of monetary policy. Like a number of other central banks, the CNB decided to conduct an external review of its monetary policy analytical and modelling framework. This was the first such review in its history.

Three independent reviews commissioned by the Bank Board in January 2024 form the centrepiece of the review. The CNB’s analytical and modelling framework was reviewed by a team led by Professor Martin Mandel and Associate Professor Karel Brůna from the Prague University of Economics and Business (VŠE), Professor John Muellbauer from the University of Oxford, and Roman Šustek from Queen Mary University of London.

The Bank Board decided on 31 October 2024 to publish all three evaluations in full, along with resources prepared at the CNB in connection with the external review – the results of a questionnaire summarising the approaches of other central banks: The Role of Macroeconomic Forecasting Models in the Central Bank’s Forecasting Process; and a general description of the modelling framework: CNB Forecasting and Policy Analysis System: Forecasting Tools.

In the first phase of the review of the CNB’s monetary policy, an internal assessment of the relevant materials was carried out and the main steps towards implementing changes were proposed. On the basis of the experts’ recommendations, the Bank Board decided to strengthen the role of research in the Research and Statistics Department and made other organisational changes to prepare the CNB for the key period ahead.

The first phase of the monetary policy review was concluded by the CNB in early April 2025 with an international workshop attended by leading foreign economists, including Claudio Borio, the former Head of the Monetary and Economic Department at the Bank for International Settlements. At the workshop, CNB representatives presented the steps taken so far and the outlook for the future. They also discussed the way forward with leading foreign economists, including experts from the ECB and the Bank of England.

The second phase will now follow. In this phase, the central bank will put the experts’ recommendations into practice. Among other things, the central bank will develop a new forecasting model to supplement its existing tools. Until now, the CNB has been one of the few central banks to rely solely on a DSGE model. The aim is to enhance its analytical and modelling framework so that, among other things, it can better withstand the current environment of unexpected economic shocks. A key step in this regard will be the development of an alternative macroeconomic forecasting model by the CNB’s Research and Statistics Department.

The Czech National Bank expects the initial results of the development of the alternative model to emerge before the end of this year. However, it could take two to three years to complete the entire process, including testing and validation of the proper functioning of the new tool. In addition to the development of an alternative model, the monetary policy review will be reflected in practice on other levels, such as research.