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Communicating Uncertainty in Monetary Policy

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  • Sharon Kozicki
  • Jill Vardy

Abstract

While central banks cannot provide complete foresight with respect to their future policy actions, it is in the interests of both central banks and market participants that central banks be transparent about their reaction functions and how they may evolve in response to economic developments, shocks, and risks to their outlooks. This paper outlines the various ways in which the Bank of Canada seeks to explain its economic outlook and monetary policy decisions, with an emphasis on how different sources of uncertainty factor into monetary policy communications. To help markets and others understand its reaction function, the central bank must explain what uncertainties are weighing on policy and how (or if) these uncertainties are being considered in policy formulation. Discussion of uncertainty becomes particularly important when a large shock has hit the economy or when a central bank’s view or its policy stance is changing. Market views and the views of the central bank will not always be aligned. The aim of monetary policy communications should not be alignment but understanding—helping markets comprehend the central bank’s policy objectives and providing a coherent rationale for policy decisions. In doing so, the bank must be transparent about the uncertainties influencing the outlook, their possible impacts and how these uncertainties will be factored into policy decisions. This paper outlines some recent and upcoming initiatives to achieve those objectives and improve Bank of Canada communications.

Suggested Citation

  • Sharon Kozicki & Jill Vardy, 2017. "Communicating Uncertainty in Monetary Policy," Discussion Papers 17-14, Bank of Canada.
  • Handle: RePEc:bca:bocadp:17-14
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    File URL: https://www.bankofcanada.ca/wp-content/uploads/2017/11/sdp2017-14.pdf
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    References listed on IDEAS

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    1. André Binette & Tony Chernis & Daniel de Munnik, 2017. "Global Real Activity for Canadian Exports: GRACE," Discussion Papers 17-2, Bank of Canada.
    2. Greg Tkacz, 2010. "An Uncertain Past: Data Revisions and Monetary Policy in Canada," Bank of Canada Review, Bank of Canada, vol. 2010(Spring), pages 41-51.
    3. John Murray, 2013. "Monetary Policy Decision Making at the Bank of Canada," Bank of Canada Review, Bank of Canada, vol. 2013(Autumn), pages 1-9.
    4. André Binette & Daniel de Munnik & Julie Melanson, 2015. "An Update - Canadian Non-Energy Exports: Past Performance and Future Prospects," Discussion Papers 15-10, Bank of Canada.
    5. Paul Jenkins & David Longworth, 2002. "Monetary Policy and Uncertainty," Bank of Canada Review, Bank of Canada, vol. 2002(Summer), pages 3-10.
    6. Lise Pichette & Pierre St-Amant & Ben Tomlin & Karine Anoma, 2015. "Measuring Potential Output at the Bank of Canada: The Extended Multivariate Filter and the Integrated Framework," Discussion Papers 15-1, Bank of Canada.
    7. Stephen S. Poloz, 2014. "Integrating Uncertainty and Monetary Policy-Making: A Practitioner’s Perspective," Discussion Papers 14-6, Bank of Canada.
    8. Tiff Macklem, 2002. "Information and Analysis for Monetary Policy: Coming to a Decision," Bank of Canada Review, Bank of Canada, vol. 2002(Summer), pages 11-18.
    9. André Binette & Daniel de Munnik & Émilien Gouin-Bonenfant, 2014. "Canadian Non-Energy Exports: Past Performance and Future Prospects," Discussion Papers 14-1, Bank of Canada.
    10. Gordon Thiessen, 1995. "Uncertainty and the transmission of monetary policy in Canada (HERMES-Glendon Lecture) [speech]," Bank of Canada Review, Bank of Canada, vol. 1995(Summer), pages 41-58.
    11. Patrick Alexander & Jean-Philippe Cayen & Alex Proulx, 2017. "An Improved Equation for Predicting Canadian Non-Commodity Exports," Discussion Papers 17-1, Bank of Canada.
    12. Jill Vardy, 2015. "Reputational Risk Management in Central Banks," Discussion Papers 15-16, Bank of Canada.
    13. Rhys R. Mendes & Stephen Murchison & Carolyn A. Wilkins, 2017. "Monetary Policy Under Uncertainty: Practice Versus Theory," Discussion Papers 17-13, Bank of Canada.
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    Cited by:

    1. Cameron MacDonald & Virginie Traclet, 2018. "The Framework for Risk Identification and Assessment," Technical Reports 113, Bank of Canada.

    More about this item

    Keywords

    Credibility; Monetary Policy; Uncertainty and monetary policy;

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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