Huw Pill advocates for robust monetary policy amid deep uncertainty

Bank of England Chief Economist Huw Pill highlighted the inherent difficulty of monetary policy in an environment of irreducible uncertainty, citing former Fed Chairman Alan Greenspan's remark that uncertainty is its 'defining characteristic'.

Pill discussed the traditional 'optimal control problem' framework, which assumed known economic models and shock distributions, leading to a 'certainty equivalence' result.

This approach, which viewed 'monetary policy as engineering', established principles like the Taylor principle and underpinned 'inflation forecast targeting' regimes.

However, this framework was recognized to miss crucial forms of uncertainty, including non-rational expectation formation, learning processes, unknown model parameters, and unclear underlying economic paradigms driving inflation.

Recent experience has challenged the belief in simple economic models, leading to a questioning of the certainty equivalence result.

Pill referenced former BoE Governor Lord King's concept of 'radical uncertainty', encompassing Knightian uncertainty, Keynesian strategic interaction, and 'unknown unknowns' that plague policymaking.

To address this, the Bank of England commissioned Ben Bernanke's 2023 review, which recommended augmenting central forecasts with 'alternative scenarios'.

This approach aims to foster 'robustness' in policy choices, ensuring decisions deliver price stability across a diverse range of environments, rather than being narrowly optimal and potentially fragile.