Thomas Jordan: Monetary policy and uncertainty
Summary of a speech by Mr Thomas Jordan, Member of the Governing Board of the Swiss
National Bank, at the University Freiburg im Breisgau, Freiburg, Germany, 15 January 2008.
The complete speech can be found in German on the Swiss National Bank's website (www.snb.ch).
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The economy is a complex system. Moreover, it is constantly changing as a result of
technological advances and globalisation. Consequently, monetary policy operates in a very
uncertain environment. The unforeseen and radical developments in the international
financial markets emanating from the current crisis in the US housing and mortgage market
have - once again - brought home the major role of uncertainty in monetary policy.
We are uncertain about the exact way in which the economy functions, the current state of
the economy and about future exogenous shocks. This uncertainty can express itself in the
form of risk, with a known probability distribution. Alternatively, it may take the form of
Knightian uncertainty, in which the probability distribution is unknown. It is the latter form of
uncertainty which presents monetary policy with the greater challenges.
Uncertainty is a reason why changes to the monetary policy instrument are generally applied
only gradually and in small steps. However, if the economy is thought to be facing major
threats, uncertainty may demand rapid and decisive action.
Monetary policy decision-makers must be aware of uncertainty and the limitations of their
knowledge. The high degree of uncertainty militates against ambitious fine-tuning of the
economy but favours focusing on the main task of monetary policy, which is maintaining
price stability. Moreover, uncertainty necessitates broad-based and impartial analysis as well
as judgment and flexibility in monetary policy decision-making.