Uncertainty and Macroeconomic Policy

The policy‐maker's decision‐making environment is rarely characterised by complete certainty or complete uncertainty, but it is useful to contemplate these extremes as a guide to action in the grey area in‐between. A pragmatic approach to circumstances without existing evidence to rely upon is to assume all events should be treated as equally likely. With detrimental outcomes as likely as neutral or positive ones, the value of insuring against the negative increases. Unless insurance itself has become more expensive, policy‐makers should consider rising uncertainty as motivating greater insurance but be cognisant of factors that may limit policy effectiveness in uncertain times.