Uncertainty and monetary policy

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; pluralism of method and the importance of judgement offer a potential solution. The literature building on Keynes’s theory of probability, in the meantime, has been refining the concept of uncertainty as something other than complete ignorance, although still falling short of quantifiability. This line of reasoning too supports pluralism of method and the importance of judgement. The purpose of this paper is to consider these different approaches taken to uncertainty for possibilities of synergy. Crucial issues are whether or not the goal is still to identify one best model, and how far model uncertainty is to be applied to individual decision-making.