Caution, experimentation and disregard is key to dealing with uncertainty, says governor of the Bank of France

Pointing out that uncertainty was inherent in the financial industry, Noyer highlighted uncertainty surrounding macroeconomic data, the nature and persistence of financial shocks, and the effect of monetary policy on the economy. For regulators to cope with such uncertainty, Noyer suggested that, in some circumstances, uncertainty is best ignored. “If the uncertainty is related to data or shocks… it may be optimal to take decisions as if there were no uncertainty at all. In these cases, the ‘certainty equivalence principle’ calls for policy to respond to the best estimate of variables in the same way that it would to perfectly measured variables, were they to be observable,” Noyer said.

Noyer also advocated caution, saying that central bankers should avoid reaction to sudden and temporary shifts in the economic system. “Markets are sensitive to speculative bubbles, while central bankers focus on fundamentals,” he said.

However, Noyer acknowledged that regulators may need to be aggressive and experiment to learn the best way to deal with off-target inflation expectations. “A more aggressive policy rule may generate more information, which would improve the learning of the central bank and thereby future policy performance,” he said. “But the learning process may be costly since it could generate increased volatility.”

Noyer suggested that while monetary rules should form the backbone of regulation, principles will be able to adapt to a fluctuating economy. “Followed as a systematic process, a rule will sometimes ignore information that may be relevant for predicting future risks to price stability,” he concluded.

Noyer was speaking at a seminar in Buenos Aires.

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