Policymaking is invariably uncertain. I created a new index of ‘policymaker’s uncertainty’ based on a textual search of the minutes of the MPC meetings since 1997. The index is constructed by simply calculating the number of references to the word ‘uncertainty’ (and its derivatives, including ‘not certain’ and ‘far from certain’) as a share of the total word count. To avoid double-counting, it also excludes the Monetary Policy Summary that was introduced in 2015. One caveat of this approach is that it doesn’t distinguish instances of low or falling uncertainty from those where uncertainty was high. That aside, this measure can offer a new insight into uncertainty compared to indicators based on media references or business surveys.
What have policymakers been most uncertain about? The indicator points to factors beyond the direct control of monetary policy, such as fiscal policy or the global environment. It peaked in the run up to the EU referendum and more recently over Brexit. For example, uncertainty was mentioned 15 times in the September 2019 minutes, just shy of the 18 times it scored in April 2016. Perhaps counter-intuitively, but similar to other metrics, the index was low by historical standards during the 2008-09 recession. But this feature may capture its beauty too: it seems to pick up second-moment shocks (uncertainty) well, without being contaminated by the first-moment shocks (the central case).
Chart 1: References to the word ‘uncertainty’ in the MPC minutes
Note: The chart shows quarterly averages.
Michal Stelmach works in the Bank’s External MPC Unit.
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