Uncertainty is no excuse for not using macroprudential tools

Angus Foulis and Saleem Bahaj

The macroprudential toolkit available to policymakers across several central banks is new and largely untested. For example, in the UK, the Bank of England’s Financial Policy Committee (FPC) has, since the financial crisis, received powers to alter bank capital requirements and to place restrictions on the terms of household mortgages for macroprudential purposes. These policy tools have not been used systemically in the past, so their impact and the FPC’s reaction function remain unclear. Moreover, in contrast to monetary policy, where price stability can be judged against inflation, the objective of macroprudential policymakers – the stability of the financial system – is inherently unobservable. Thus macroprudential policymakers face a high degree of uncertainty over the impact and effectiveness of their tools and a target variable they cannot perfectly observe.

Continue reading “Uncertainty is no excuse for not using macroprudential tools”

On the benefits of reducing uncertainty about policy

Riccardo M Masolo and Francesca Monti.

Newspapers and other media outlets regularly speculate about what the Bank of England might do in response to current economic conditions. Curiously, however, most of the models we use to carry out our economic and policy analysis completely disregard this type of uncertainty. Many of them consider how people would behave when uncertain about the state of the economy, yet everyone is assumed to know for sure the variables that the central bank will respond to, how aggressively and why. To try and fill this gap between the models we typically use and the reality we actually face, in our paper we explore the effects of Knightian uncertainty about the behaviour of the policymaker in an otherwise standard macro model. Continue reading “On the benefits of reducing uncertainty about policy”