Bank of England Governor Mervyn King said recently that judgement was crucial to sound monetary policy, even at central banks like the BOE that have inflation targets as policy guides.
Commenting on remarks made by Federal Reserve Chairman Alan Greenspan at the annual meeting of the American Economic Association, King said he agreed a risk-management approach to monetary policy was important.
"This is exactly the approach taken at the Bank of England, where the Monetary Policy Committee takes into account the entire distribution of future outcomes for inflation and output when setting interest rates," he said.
"In the end there is no escaping the need to make judgements about which models are more plausible than others," King said.
He also said he agreed with Greenspan that central banks would be wise not to target asset prices, although he said it was valuable to take a long-term view of the economy to gauge whether movements in asset prices posed an unwelcome risk.
"Within an inflation-targeting framework, a central bank that was forward-looking would ask the question of how asset price movements might affect future forecasts of output and inflation," he said.