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The many shades of uncertainty and monetary policy

Author

Listed:
  • Elisa Guglielminetti

    (Bank of Italy)

  • Alessandro Lin

    (Bank of Italy)

  • Andrea Tiseno

    (Bank of Italy)

Abstract

This paper reviews how different sources of uncertainty influence monetary policy design and transmission. Within a New Keynesian framework, we distinguish between uncertainty arising from non-linearities in the economy and that stemming from imperfect information held by either the central bank or the private sector. While uncertainty is neutral under linearity and full-information rational expectations, departures from these conditions render it consequential for monetary policy. Non-linearities and information frictions alter the optimal degree of policy gradualism and may warrant either more forceful or more cautious responses. The proposed taxonomy offers a structured approach for policy discussions concerning appropriate monetary responses and communication strategies in the face of different types of uncertainty.

Suggested Citation

  • Elisa Guglielminetti & Alessandro Lin & Andrea Tiseno, 2025. "The many shades of uncertainty and monetary policy," Questioni di Economia e Finanza (Occasional Papers) 978, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_978_25
    as

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    References listed on IDEAS

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    More about this item

    Keywords

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • 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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