Uncertainty in Macroeconomic Policy Making: Art or Science? - lecture by Mervyn King

At a Royal Society Conference in London today on 'Handling Uncertainty in Science', the Governor of the Bank - Mervyn King - presented a paper on the important role uncertainty plays when devising public policy and discusses new ways of communicating uncertainty around the Bank's forecasts for growth and inflation currently being evaluated by the Monetary Policy Committee.
Published on 22 March 2010

The Governor begins by noting that the challenge of unpredictability is one faced not just by economists. Many subjects are ".united by a common need to grapple with complex systems and communicate forecasts to a wide audience." He also notes that ".it is not enough to explain only to experts. Much of the value of forecasts is in their being understood - in all their subtleties - by the general public." But what are the sources of unpredictability? He explains that there are at least three. First, it is very difficult to assign probabilities to infrequent, high impact events, such as financial crises, or tsunamis, for which there are few precedents. Second, that the impact of similar shocks can be highly dependent on the starting conditions of systems. And third, there can be sudden transitions between different states of the world, be they ocean currents or social attitudes, which are hard to predict.

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