Policymaking under Uncertainty: Gradualism and Robustness

Policymakers are often required to make decisions in the face of uncertainty. For example, they may lack the timely data needed to choose the most appropriate course of action at a given point in time. Alternatively, they may be unable to gauge whether the models they rely on to guide their decisions can account for all of the issues that are relevant to their decisions. These concerns obviously arise in the formulation of monetary policy, where the real-time data relevant for deciding on policy are limited and the macroeconomic models used to guide policy are at best crude simplifications. Not surprisingly, a long-standing practical question for monetary authorities concerns how to adjust their actions given the uncertainty they face.