Thus, risk is unavoidable, and central banks need to conduct policy in a manner that takes account of uncertainty in its various forms, as they strive to maximize public welfare. But what exactly does this mean? The literature on this topic extends at least as far back as William Brainard’s original paper on uncertainty and policy almost forty years ago.
7 Brainard’s analysis showed that if policymakers are uncertain about how real activity and inflation will be affected over time by monetary actions, they should be less aggressive in responding to changes in economic conditions than would be the case if they knew the true model of the economy.