Monetary Policy, Uncertainty, and Communications

Vaishali Garga, Edward Herbst, Alisdair McKay, Giovanni Nicolo and Matthias Paustian
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Giovanni Nicolo: https://www.federalreserve.gov/econres/giovanni-nicolo.htm
Matthias Paustian: https://www.federalreserve.gov/econres/matthias-o-paustian.htm

No 25-11, Working Papers from Federal Reserve Bank of Boston

Abstract: We review the design and communication of monetary policy strategies that take into account risks and uncertainty. A key element in a robust monetary strategy is the concept of risk management, which is the weighing of key risks when setting policy. When risks to the outlook are balanced, the baseline outlook may be sufficient to guide policy decisions. However, risk-management considerations become important when risks are asymmetric. We discuss how robust simple interest rate rules and optimal control policy can incorporate risk-management considerations into the design of a monetary policy strategy. Alternative scenarios can illustrate salient risks and how monetary policy might respond if those risks were to materialize. However, using alternative scenarios in policy deliberations and communications requires important implementation choices.

Keywords: uncertainty; Robust monetary policy strategies; risk management; scenario analysis; monetary policy communication (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E58 (search for similar items in EconPapers)
Pages: 22
Date: 2025-09-01
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Working Paper: Monetary Policy, Uncertainty, and Communications (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbwp:101949

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DOI: 10.29412/res.wp.2025.11

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