Uncertain uncertainty - speech by Martin Weale

In a speech to the Institute and Faculty of Actuaries in London, Martin Weale - External Member of the Monetary Policy Committee (MPC) - discusses the nature of the uncertainty surrounding macroeconomic forecasts and describes how it might be represented.
Published on 29 March 2011

Although economic forecasting is far from an exact science, Martin Weale begins by describing its necessity. He says: ".since policy moves such as interest rate changes take some time to have an effect, it makes more sense to set policy not with reference to the current state of the economy but with reference to where it is expected to be or, more explicitly, where inflation would be expected to be at any given interest rate setting". For that reason, the MPC normally aims to set monetary policy so as to achieve the inflation target in about two years' time. He adds that: ".if the MPC aimed to achieve the inflation target too quickly, the process might well match that of someone trying desperately to adjust a shower to the right temperature. By failing to take account of the lag between turning the taps and variations in the temperature of the water that comes out, the bather is condemned to a sequence of water which is too hot followed by water which is too cold and so on. Only a degree of patience can deliver a comfortable shower."

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