Monetary Policy and the Management of Uncertainty: A Narrative Approach
30 Pages Posted: 18 Jun 2020
Date Written: June 5, 2020
In this paper we explore how macroeconomic theory might be augmented, and the practice of monetary policy better understood, if approached through ideas from social and psychological science. A modern, inflation-targeting central bank faces ‘radical’ uncertainty both in understanding the economy and in knowing how best to communicate policy decisions to influence behaviour. We make use of narrative theory to explore these challenges, drawing on fieldwork with the Bank’s regional Agencies and conversations with staff and policy-makers. We find that the intelligence gathered from conversations with businesses is uniquely useful for both the analysis and communication of monetary policy. Such intelligence embodies knowledge about the plans which are making the future. It also provides insights into how economic agents understand the economy they are creating. These insights can help the Monetary Policy Committee to communicate its policy as a narrative the public understands and commits to. We propose further research to advance and test these ideas.
Keywords: Monetary policy, narrative theory, uncertainty, inflation-targeting, central bank communication, macroeconomic theory, economic knowledge
JEL Classification: E52, E58
Suggested Citation: Suggested Citation