Uncertainty and Monetary Policy

Abstract

The experience of monetary policy making in an uncertain environment has encouraged increased attention to the concept of model uncertainty, that is, uncertainty as to which is the best model. A particular difficulty has been the need to operationalise the concept in order to yield definitive policy recommendations. If this type of uncertainty is unquantifiable, then a policy rule determined by a single model may not in fact be the best approach; pluralism of method and the exercise of judgement offer a potential solution. A rigorous foundation for such an approach is available in Keynes's philosophical analysis of decision making under uncertainty. It is concluded that more analytical attention needs to be devoted to agents' own model uncertainty, and to judgement. But ultimately the scope for synthesis between the model uncertainty and Keynes uncertainty approaches rests on whether or not the subject matter is such that knowledge of it is best represented by one formal model.