Monetary Policy, Uncertainty, and Communications 
This paper identifies key elements of a monetary policy strategy that is robust in the face of risks and uncertainty, including risk and uncertainty involving the state and structure of the economy and the formation of expectations.
Key Findings
- Setting policy under uncertainty requires flexibility to adapt to changing circumstances, but also a systematic approach so that policy is predictable and longer-term inflation expectations remain anchored.
- The implications for monetary policy of uncertainty depend crucially on the specific source of uncertainty and the modeling framework chosen for the analysis.
- Greater uncertainty does not generically tilt optimal monetary policy decisions to become more gradual, nor is a more aggressive approach universally preferable.
- At times of heightened risk, central bank communications play an important role by connecting current and future policy actions to risk-management considerations in the context of an evolving outlook.
- Alternative scenarios can be used to communicate how policy is responding or will respond to developments in a way that best achieves policy goals; however, using alternative scenarios in this way requires making several important implementation choices and weighing the associated benefits and costs.
Implications
A robust monetary policy strategy aims to stabilize economic activity and inflation across a wide range of highly uncertain developments. It includes key elements that are part of any well-designed monetary policy strategy: It is systematic yet flexible, firmly anchors longer-term inflation expectations, and clearly communicates the rationale for the policy decision. In addition, it incorporates risk-management considerations through the weighing of key risks in setting monetary policy.
Abstract
We review the design and communication of monetary policy strategies that take into account risks and uncertainty. A key element in a robust monetary strategy is the concept of risk management, which is the weighing of key risks when setting policy. When risks to the outlook are balanced, the baseline outlook may be sufficient to guide policy decisions. However, risk-management considerations become important when risks are asymmetric. We discuss how robust simple interest rate rules and optimal control policy can incorporate risk-management considerations into the design of a monetary policy strategy. Alternative scenarios can illustrate salient risks and how monetary policy might respond if those risks were to materialize. However, using alternative scenarios in policy deliberations and communications requires important implementation choices.