Risk Uncertainty and Monetary Policy Regimes - speech by Paul Tucker

In a speech today to the UK Asset and Liability Management Association, Paul Tucker - Executive Director for Markets and a member of the Monetary Policy Committee - explores how option prices can shed light on the risks in the current financial environment, including uncertainty about the expected path of monetary policy.
Published on 29 January 2004

Mr Tucker says that, although financial markets have recovered considerably over the past year, the environment for financial firms is not hazard-free. Future exchange rate movements and the path of global interest rates are the main current uncertainties. Looking at options prices and what they might reveal about market uncertainty, Mr Tucker suggests that, although there is evidence that monetary policy has become more credible than in the past, there is also evidence of greater uncertainty about the path of future nominal interest rates, especially in the United States. Mr Tucker says there is likely to be modestly greater uncertainty when official interest rates are materially away from their neutral level, when there is "not only that uncertainty about future shocks but also uncertainty about how, absent shocks, the central bank would return to neutral".

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