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The central banker as a risk manager

Author

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  • Frank Smets

Abstract

We present a risk management tool for monetary policy. We argue that two necessary elements for analysing risk in this context are: 1) The forecast distribution of the inflation rate; and 2) a measure of the attitude of the central banker towards inflation risk relative to deflation risk. The relevant information in the forecast distribution of inflation can be summarised by a simple analytical tool that we refer to as the “balance of risks”. The balance of risks indicates the extent to which upward risk to inflation outweighs the downward risk. JEL Classification: E31, E52, E58

Suggested Citation

  • Frank Smets, 2005. "The central banker as a risk manager," Research Bulletin, European Central Bank, vol. 2, pages 6-7.
    • Handle: RePEc:ecb:ecbrbu:2005:0002:2
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    File URL: http://www.ecb.europa.eu/pub/pdf/other/researchbulletin02en.pdf
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    More about this item

    Keywords

    monetary policy; inflation; output; risk; preferences; policy rule;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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