Policymakers' Uncertainty

67 Pages Posted: 11 Oct 2021

See all articles by Anna Cieslak

Anna Cieslak

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Stephen Hansen

Imperial College Business School

Michael McMahon

University of Oxford

Song Xiao

London School of Economics & Political Science (LSE)

Date Written: October 5, 2021

Abstract

We study how uncertainty affects decision-making in the context of monetary policy. We exploit the rich informational content of the Federal Open Market Committee (FOMC) meetings to construct text-based measures of uncertainty that policymakers confront as well as policy preferences they express. Our identification relies on the regular structure of the FOMC meetings, which separate discussions of the economic environment from policy deliberations. By distinguishing different sources of uncertainty related to inflation, the real economy, financial markets, and models in the economy round of the meeting, we show their distinct effects on policy preferences. In particular, heightened inflation uncertainty and, to some degree, uncertainty about the real economy lead to an amplification rather than attenuation of the monetary policy response to the macroeconomy. This fact presents a departure from certainty equivalence frequently assumed in monetary models and contrasts with the oft-referenced conservatism principle of policymaking under uncertainty. Instead, the evidence suggests that policymakers display some preference for robustness to avoid costly outcomes. We discuss quantitative implications of our findings for models of optimal monetary policy.

Keywords: uncertainty, monetary policy, Federal Reserve

JEL Classification: E52, E58

Suggested Citation

Cieslak, Anna and Hansen, Stephen and McMahon, Michael and Xiao, Song, Policymakers' Uncertainty (October 5, 2021). Available at SSRN: https://ssrn.com/abstract=3936999 or http://dx.doi.org/10.2139/ssrn.3936999

Anna Cieslak (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919 660 7879 (Phone)

HOME PAGE: https://sites.google.com/site/ancieslak/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephen Hansen

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Michael McMahon

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Song Xiao

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
128
Abstract Views
523
rank
285,067
PlumX Metrics