Measuring climate-related financial risks using scenario analysis

Since the early 1990s, many central banks worldwide have adopted a framework for monetary policy known as “inflation targeting”.[ 1 ] In this framework, central banks announce a target rate or range for medium-term inflation, typically 2%, and adjust short-term interest rates to steer actual inflation towards the target.[ 2 ] The rise of inflation targeting was a response to the turbulent inflation episodes of the 1970s and 1980s when most central banks were only loosely committed to price stability. Inflation targeting was an acknowledgement that monetary policy was most effective when it was given a clear mandate. Inflation targeting went hand-in-hand with a discernible increase in central bank independence and transparency. Central banks operating outside the influence of political election cycles played a critical role in making inflation targeting credible and feasible. Political independence, in turn, required central bank officials to publicly explain and justify their actions as a manifestation of democratic accountability. Greater transparency was also needed to operationalise inflation targeting. The reason is that, given the lags in monetary policy transmission, central banks can only affect future inflation. As such, inflation targeting has typically been formulated in terms of inflation forecast targeting where the central bank adjusts policy to offset d post: ECB's Schnabel: Forecast Errors Contributed To Central Banks’ Delayed Reaction To The Surge In Inflation post: MORE ECB'S SCHNABEL: CENTRAL BANKERS SHOULD EVALUATE HOW PROJECTIONS COULD BE MADE MORE ROBUST #europeancentralbank #isabelschnabel #ecb #monetarypolicy #interestrates #inflation