“Mensch tracht, und Gott lacht” – what’s the best guidance on monetary policy?
David Miles 22 October 2014
Many central banks embrace forward guidance by announcing expected interest rate paths. But how likely it is that actual rates will be close to expected ones? This column argues that quantifying such uncertainty poses great difficulties. Precise probability statements in a world of uncertainty (not just risk) can be misleading. It might be better to rely on qualitative guidance such as: “Interest rate rises will probably be gradual and likely to be to a level below the old normal”.
“Mensch tracht, und Gott lacht” is a Yiddish proverb – men plan and God laughs. Woody Allen puts the same thought this way: “If you want to make God laugh tell him about your plans”. Some people might see these words as a fitting epitaph for forward guidance on monetary policy. The Bank of England has certainly faced a good deal of criticism for the guidance that it has recently been giving, as has the Federal Reserve in the US.
forward guidance, unconventional monetary policy, monetary policy, Central Banks, central bank communication, interest rates, uncertainty
The value of variation in clinical practice under uncertainty
Charles F Manski 01 October 2014
Clinical practice guidelines recommend treating all patients with similar attributes the same way. This column argues that, under conditions of uncertainty or ambiguity, this may be bad advice. Treating similar patients differently provides two benefits. The first is diversification – assigning similar patients to different treatments limits the consequences of choosing an inappropriate treatment. The second benefit is that randomly assigning treatments helps clinicians learn which ones are most effective.
Commentators on delivery of healthcare regularly decry ‘unwarranted’ or ‘inappropriate’ variation in clinical practice and recommend uniform treatment of observationally similar patients. This recommendation, often expressed in clinical practice guidelines, is well-motivated if knowledge of treatment response is strong enough to determine optimal treatments. However, much patient care is delivered with substantial uncertainty.
health, healthcare, medicine, treatment, uncertainty, ambiguity, regret, diversification, learning
Lacklustre investment in the Eurozone: Is there a puzzle?
Marco Buti, Philipp Mohl 04 June 2014
Investment in the Eurozone is forecast to remain below trend until 2015, with a particularly large shortfall in the periphery. Low investment reduces aggregate demand, thus lowering short-term growth, and it also hampers medium-term growth through its effect on the capital stock. This column highlights three causes of low Eurozone investment – reduced public investment, financial fragmentation, and heightened uncertainty – and proposes a series of remedies.
On the importance of investment for the Eurozone economy
According to the European Commission’s most recent forecast, real economic activity in the Eurozone is expected to recover at a moderate pace until 2015, and to remain significantly weaker than in the US (European Commission 2014a).
EU policies Macroeconomic policy
eurozone, growth, European Commission, investment, uncertainty, structural reforms, Bankruptcy, Eurozone crisis, public investment, banking union, financial fragmentation
Does policy uncertainty reduce economic activity? Insights and evidence from large trade reforms
Kyle Handley, Nuno Limão 23 November 2013
The impact of policy uncertainty on economic activity is potentially important, but controversial because it is hard to identify and quantify. Recent research provides a framework to identify the impacts of policy uncertainty on firm decisions, and finds it has strong effects in the context of international trade. China’s WTO accession secured its most-favoured nation status in the US, and the evidence shows this reduction in uncertainty can explain a significant fraction of its export boom to the US.
The impact of policy uncertainty on economic activity is an issue traditionally associated with developing countries. Since 2008, however, the spotlight has shifted. Governments’ responses to the Great Recession and the Eurozone crisis have raised considerable uncertainty about the future policies of advanced economies. Examples include the timing and size of financial bailouts, government expenditures, and the risk of sovereign-debt default. These crises have also heightened trade policy uncertainty.
US, China, WTO, trade, uncertainty, Great Recession, Eurozone crisis
Journal quality and citations: Why economists should practice what they preach
Daniel Sgroi 11 November 2013
In the upcoming UK Research Excellence Framework, a small panel of academics are tasked with rating thousands of academic submissions, which will result in university departments being ranked and public money being distributed. Given the enormity of the task and the scarcity of the resources devoted to it, this article discusses a straightforward procedure that might help, based on exactly the Bayesian methods that academic economists study and teach when considering the problem of decision-making under uncertainty.
The UK is about to enter into one of the most important academic ranking exercises in its history. The Research Excellence Framework (or REF), starting in 2014, will determine how money is divided between departments and how the UK perceives the quality of its own universities and departments. As part of this process, university-based research-active academics throughout the UK will soon be submitting work to the REF. There will be one panel for each discipline, each made up of a number of highly esteemed academics who will review the submissions.
higher education, uncertainty, academia, rankings, journals, Bayes’ rule
Reduced policy uncertainty and the Japanese economy
Masayuki Morikawa 02 November 2013
Reduced policy uncertainty can contribute to a country’s economic growth. This column highlights the negative influence of policy uncertainty and political instability on the growth of Japan. A survey shows that international trade and tax polices pose the greatest uncertainty on Japanese companies. The column concludes with a discussion of the mechanism via which uncertainty affects corporate behavior.
While the effects of the 'three arrows' of the Japanese Abenomics policy mix – bold monetary easing, flexible fiscal policy, and the growth strategy –have attracted worldwide attention, reduced policy uncertainty is also expected to contribute to the country’s economic growth by stimulating long-term investments in the private sector.
Institutions and economics
economic growth, Japan, uncertainty
Economic uncertainty and the effectiveness of monetary policy
Knut Are Aastveit, Gisle James Natvik, Sergio Sola 19 October 2013
Many analysts blame uncertainty for at least part of advance nations’ poor economic performance since the crisis. This column discusses new research showing that the economic impact of monetary policy is dampened when uncertainty is high. This means that high uncertainty forces monetary policymakers into a trade-off between acting decisively and acting correctly as policy must be more aggressive than otherwise in order to stabilise economic activity. The finding is particularly stark when uncertainty measures from financial markets are utilised.
Since the onset of the “Great recession”, economists have struggled to explain why the recovery has been so slow, despite the many policy measures that have been passed to re-invigorate economic activity. One candidate explanation that several have pointed to, for instance Baker, Bloom, Davis and Van Reenen (2012), is economic uncertainty. The argument is that uncertainty is likely to induce cautious behaviour, as decisions made today are more likely to prove “wrong” in the future, in which case they will have to be reversed at some cost.
monetary policy, uncertainty, Great Recession
Facing up to uncertainty in climate-change economics
Geoffrey Heal, Antony Millner 13 June 2013
Uncertainty is intrinsic in climate-change economics. This column argues that it’s here to stay. There will be no accurate predictive tool for predicting economic growth, the emergence of clean-energy technology, or economic vulnerability in light of climate change in the near future. But this is not an excuse not to think about climate economics. Research and policy would do well to be more explicit about what we don’t know. We should avoid subjective guesses, and focus more on credible forecasts from empirically sound, if uncertain, models.
Uncertainty is intrinsic in climate change economics. We know that increases in greenhouse gas concentrations are causing shifts in the climate, but not precisely how large these shifts will be, nor when and where they will occur. Neither do we understand fully the social and economic consequences of these changes, or the options that will be available for coping with them in the future. Characterising our knowledge of these uncertainties, and finding decision tools that are appropriate to our state of knowledge, is a vital part of sensible evaluations of climate-policy options.
climate change, uncertainty
Falling policy uncertainty is igniting the US recovery
Scott Baker, Nicholas Bloom 07 February 2012
Reading the business press, one gets the impression that the world of policy is in a very uncertain state around the world. This column presents an up-to-date index of policy uncertainty and suggests that the calming of policy uncertainty may have aided recent economic prospects in the US. Unfortunately, policy uncertainty still appears extremely high in Europe with the Eurozone crisis.
Because economic policy affects economic outcomes, policy uncertainty matters (Hallward-Driemeier and Pritchett 2010, Bloom 2009, and Bloom et al. 2007). Reading the business press, one gets the impression that the world of policy (taxation, regulation, fiscal stimulus, etc.) is in a very uncertain state in the US, Europe, Japan, and several of the biggest emerging markets. This has led to a debate over whether policy uncertainty is holding back the recovery (Mishel 2011).
uncertainty, US recovery, policy
Growth from international capital flows: The role of volatility regimes
Ashoka Mody, Antu Panini Murshid 27 November 2011
Recent commentary has suggested that capital inflows – long considered a positive for growth – may actually be doing more harm than good. This column presents new evidence reinforcing the conventional interpretation. It finds that volatility is the determining factor. With volatility below a threshold, an inflow of foreign capital promotes growth. But during periods of volatile growth, the effect is opposite.
In a recent survey, Kose et al (2006) find little robust evidence for long-run growth benefits from global capital inflows. Prasad et al (2006) go a step further. They argue that developing countries grow faster when they rely less on foreign capital, as suggested by a positive relationship between current-account surpluses (capital outflows) and average growth (Figure 1).
International finance International trade
volatility, capital flows, uncertainty