on a smoothed path. this reflects the fact that the economic outlook and the required path of interest rates are uncertain, and a smoothed path for interest rates can provide more time to assess our assumptions about the economy before taking policy actions. in other words, our central projections are designed to deliver small considered steps – tapuwae kotuku. risk management and a least regrets approach when it comes to lessons from the academic literature, there are no hard and fast rules about how to make monetary policy decisions that are robust to periods of heightened or extreme uncertainty. the earliest theoretical research suggested taking small steps was most appropriate, but subsequent research has found a range of circumstances where it is appropriate to make large and rapid changes in the policy stance, highlighting that the answer depends on the specific circumstances. 5 while the academic literature is mixed, there is, however, a long tradition among central banks globally of applying a risk management approach to monetary policy decisions under uncertainty. 6 although most of the time actions will be based on the central bank ’ s view of the most likely outcome for the economy, a common feature of these risk management approaches is that policy will occasionally be set to mitigate the risk of a very bad outcome for the economy that threatens the central bank ’ s ability to achieve its mandate. in a seminal paper, brainard ( 1967 ) found that heightened uncertainty dictates changing policy in small steps. subsequent research includes ferrati et al ( 2019 ), who show that the appropriate response to uncertainty about the relationship between inflation and unemployment will vary depending on model assumptions. also see kay and king ( 2020 ) for an extensive discussion of decision - making under irresolvable uncertainty. in addition to the speech by greenspan referred to in footnote 3, the role of risk management in monetary policy decision - making has been set out in speeches by the federal reserve ( evans ( 2019 ) ), the bank of canada ( poloz ( 2020 ), and reserve bank of australia ( stevens ( 2009 ) ). a least regrets approach to uncertainty : hawks, doves and the white heron ( he kotuku ) indeed, research of the decisions made by the us federal reserve show traits of this type of risk management approach in around 25 percent of cases between 1987 and 2008. 7 in the same spirit of these risk management approaches used by central banks globally, in recent years our monetary policy committee at te putea matua has developed a language around its “ least regrets ”, to complement the signals from

ft. com / video / 62d5bfc4 - 3b89 - 39ca - 97bf - c19d6fe097fc kay, j and king, m ( 2020 ) ‘ radical uncertainty : decision - making beyond the numbers ’. poloz, s ( 2020 ) ‘ dealing with exreme uncertainty ’, bank of canada speech. ratcliffe, j and kendall, r ( 2019 ) ‘ monetary policy strategy in new zealand ’, reserve bank of new zealand bulletin, 82 : 3. stevens, g ( 2009 ) ‘ the conduct of monetary policy in crisis and recovery ’, reserve bank of australia speech. a least regrets approach to uncertainty : hawks, doves and the white heron ( he kotuku ) annex 1 : summary of least regrets monetary policy since the arrival of covid - 19 source of uncertainty immediate postcovid period march - may 2020 initial recovery from covid february 2021 most recent august 2021 starting point uncertainty uncertainty so heightened that central projections were replaced with alternative scenarios. health measures more effective in containing covid - 19 than initially feared. although a robust recovery in spending is underway, there is ongoing uncertainty about the impacts of covid - 19 on the supply side of the economy. several published downside scenarios highlighted a material risk of a severe economic correction. although risks to the outlook were becoming less skewed, it was unclear how the economy would cope with expiry of wage subsidy support and the absence of international tourists. downside risks of a severe contraction have declined as evidence has accumulated that demand in the economy is more resilient to covid - 19 than we had feared. a prolonged downturn could still present a threat to inflation and employment objectives. increased confidence that robust demand and supply constraints will feed through into more persistent inflation pressures, and that employment is at its maximum sustainable level. maintain stimulus until confident that inflation and employment objectives will be sustainably achieved. reduce monetary policy stimulus to reduce the risk that inflation expectations become unanchored. bias of risks to the outlook our ability to stimulate the economy could have been constrained by the effective lower bound. risks to achieving our mandate significant threat to employment mandate if risks to the economy materialised. a decade of below - target inflation increased risk of expectations becoming deanchored on the downside. least regrets deliver stimulus sooner rather than later, thus minimising the risk that stimulus delivered turns out not to be enough. considerable monetary and fiscal stimulus supporting the economy.