Uncertainty, Transparency, and Future Monetary Policy

In 2004, Chairman Greenspan argued in his address to the American Economic Association that the Federal Reserve’s experiences over the past two decades “make it clear that uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of the landscape” (Greenspan 2004, p. 36). Further elaborating the notion of monetary policy under uncertainty, at the Fourth Conference on the International Research Forum on Monetary Policy, Federal Reserve vice chairman Donald L. Kohn (2006) discussed in detail the role of uncertainty and its influence on the formulation of monetary policy. Greenspan and Kohn use the concepts of “uncertainty” and “risk” loosely rather than formally. Economists often describe “uncertainty” to mean Knightian random events with limited or no prior occurrence and thus without known probability distributions in contrast to “risk” that measures sampling from a known pool of probable events with an empirical probability distribution calculated from repeated past occurrences.