Monetary Policy-Making: Fact and Fiction - speech by Richard Lambert

In a speech today in Bristol, Richard Lambert, an external member of the Monetary Policy Committee, reflects on his two years on the MPC and on the uncertainty inherent in setting monetary policy.
Published on 24 May 2005

Mr Lambert says that when setting interest rates, “it is critically important to recognise the lack of certainty about all the key issues which have to be addressed”. Although there are yardsticks – such as the output gap and neutral interest rate – against which to judge the appropriate course of action, few of them are directly measurable or easily observable. Yardsticks may also be based on assumptions that are simply wrong and on data that are subject to revision. Mr Lambert says “…there are no set rules”. He demonstrates the difficulties by considering the uncertainty surrounding the neutral real interest rate, measures of the output gap and the equilibrium unemployment rate. He argues that “...it is impossible at any moment in time to pin down the neutral rate with the degree of precision necessary to use it as a guide in each month’s decision”.

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