Integrating uncertainty and monetary policy-making: A practitioner's perspective

This paper discusses how central banking is evolving in light of recent experience, with particular emphasis on the incorporation of uncertainty into policy decision-making. The sort of post-crisis uncertainty that central banks are dealing with today is more profound than that which is typically subjected to rigorous analysis and does not lend itself easily to formal modelling. As a practical matter, the policy-maker is dependent on macro models to develop a coherent monetary policy plan, and this burden of coherence means that fundamental uncertainty must be incorporated explicitly into the policy formulation process. As suggested here, doing so transforms policy formulation from an exercise in reverse engineering to one of risk management, one consequence of which is to inject a little more realism about uncertainty into the policy narrative, while trusting markets to wrestle with the data flow and deliver two-way trading. The evolution is likely to be a long one - researchers are encouraged to keep focusing on developing a practical understanding of how the economy works, one that admits that rules around economic behaviour are not cast in stone, but are almost certainly subject to variation through time and events.Le présent article examine l’évolution que connaissent les banques centrales à la lumière de l’expérience récente et met l’accent sur l’intégration de l’incertitude dans le processus d’élaboration de la politique monétaire. L’incertitude à laquelle les banques centrales sont confrontées dans un contexte d’après-crise est plus profonde que celle faisant généralement l’objet d’analyses rigoureuses et ne se prête pas aussi facilement à la modélisation formelle. Dans la pratique, le décideur dépend des modèles macroéconomiques pour la mise au point d’un plan cohérent en matière de politique monétaire, et en raison de cette exigence de cohérence, l’incertitude fondamentale doit être explicitement prise en compte dans l’élaboration de cette politique. Ce faisant, la formulation de la politique ne repose plus sur un modèle purement technique, mais plutôt sur un processus de gestion des risques. C’est donc dire qu’il faut tenir compte de l’incertitude de façon un peu plus réaliste dans le message de la Banque, tout en se fiant aux marchés pour jongler avec les flux de données et s’ajuster dans les deux sens. L’évolution sera sûrement longue. On encourage les chercheurs à poursuivre leurs efforts pour en arriver à une compréhension pratique des rouages de l’économie, et ainsi reconnaître que les règles entourant les comportements économiques ne sont pas immuables, mais varient presque inévitablement au fil du temps ou des événements

Changing fortunes: Long-termism - G-Zero, artificial intelligence and debt

This paper looks at the implications for monetary policy of the widespread adoption of artificial intelligence and machine learning, which is sometimes called the "fourth industrial revolution". The paper reviews experiences from the previous three industrial revolutions, developing a template of shared characteristics: new technology displaces workers; investor hype linked to the new technology leads to financial excesses; new types of jobs are created; productivity and potential output rise; prices and inflation fall; and real debt burdens increase, which can provoke crises when asset prices crash. The experience of the Federal Reserve during 1995-2006 is particularly instructive. The paper uses the Bank of Canada's main structural model, ToTEM (Terms-of-Trade Economic Model), to replicate that experience and consider options for monetary policy. Under a Taylor rule, monetary policy may allow growth to run as long as inflation remains subdued, easing the burden of adjustment on those workers directly affected by the new technology, while macroprudential policies help check financial excesses. This argues for a family of Taylor rules enhanced by the addition of financial stability considerations

Technological progress and monetary policy: Managing the fourth industrial revolution

This paper looks at the implications for monetary policy of the widespread adoption of artificial intelligence and machine learning, which is sometimes called the "fourth industrial revolution". The paper reviews experiences from the previous three industrial revolutions, developing a template of shared characteristics: new technology displaces workers; investor hype linked to the new technology leads to financial excesses; new types of jobs are created; productivity and potential output rise; prices and inflation fall; and real debt burdens increase, which can provoke crises when asset prices crash. The experience of the Federal Reserve during 1995-2006 is particularly instructive. The paper uses the Bank of Canada's main structural model, ToTEM (Terms-of-Trade Economic Model), to replicate that experience and consider options for monetary policy. Under a Taylor rule, monetary policy may allow growth to run as long as inflation remains subdued, easing the burden of adjustment on those workers directly affected by the new technology, while macroprudential policies help check financial excesses. This argues for a family of Taylor rules enhanced by the addition of financial stability considerations

The Causes of Unemployment in Canada: A Review of the Evidence

This paper reviews various competing theories of structural unemployment and considers whether they may be used to explain any of the rise in unemployment experienced by Canada during the most recent economic cycle. The central message that emerges is that one should take into account multiple possible structural explanations when forming judgments about the non-accelerating- inflation rate of unemployment (the NAIRU). Furthermore, the degree of uncertainty associated with existing empirical work suggests that one should allow for a range of NAIRU estimates in reaching an understanding of economic developments. A balanced assessment of the available methodologies suggests that the NAIRU has risen somewhat during the 1990s, mainly because of a steep rise in the rate of payroll taxation. Nevertheless, the paper concludes that this rise in the NAIRU is likely to be temporary, both because the payroll tax effect ought to be digestible over time and because some reforms to the unemployment insurance system have already been implemented.