Uncertainty in macroeconomic policy-making: art or science?

Abstract

Uncertainty is pervasive in economic policy-making. Modern economies share similarities with other complex systems in their unpredictability. But economic systems also differ from those in the natural sciences because outcomes are affected by the state of beliefs of the systems' participants. The dynamics of beliefs and how they interact with economic outcomes can be rich and unpredictable. This paper relates these ideas to the recent crisis, which has reminded us that we need a financial system that is resilient in the face of the unpredictable and extreme. It also highlights how such uncertainty puts a premium on sound communication strategies by policy-makers. This creates challenges in informing others about the uncertainties in the economy, and how policy is set in the face of those uncertainties. We show how the Bank of England tries to deal with some of these challenges in its communications about monetary policy.