Monetary policy by signal
The way in which monetary policy is understood, both in practice and in the theoretical literature, has evolved in significant ways over the last few decades. Most significant, arguably, is an increasing awareness of the importance of the presentation of monetary policy. Central bankers have long been aware of the importance of the signalling effect of interest rate decisions on the one hand, and the care with which official pronouncements should be worded on the other. But it is only recently that there has been public discussion by central banks of the means by which monetary policy decisions are reached. At the same time, the theoretical literature has increased its focus on information, and information asymmetries between the monetary authorities and markets, as a critical element determining the outcome of monetary policy decisions. In particular there has been an increased focus on the transparency of monetary policy decision-making. But analysis of signals in relation to uncertainty qualifies the case for transparency. The purpose of this paper is to reflect on the signalling aspect of monetary policy in terms of an analysis of uncertainty. In particular, we consider how the central bank signals its own uncertainty.
We distinguish uncertainty in the economic system in a global sense, from model uncertainty on the one hand, and signal uncertainty on the other. Given that the signals emanating from the decision-making process of monetary policy are both quantitative and discursive, signal uncertainty finds expression both in quantitative and non-quantitative ways. We are interested here in how model and signal uncertainty are related, and how to analyse non-quantitative signal uncertainty. In particular we discuss the scope for measurement of uncertainty by means of quantitative indicators and by means of discourse analysis. We then suggest an application of our approach to the monetary policy process of the Bank of England.
Preprint: 2007-DowKlaesMontagnoli-preprint.pdf
Bibliographical details of authoritative and final version:
Dow, S. C.; Klaes, M.; Montagnoli, A. 2007. Monetary policy by signal. In D. G. Mayes and J. Toporowski eds. Open Market Operations and Financial Markets. London: Routledge 2007, pp. 264-280.
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