Under our current agreement, we aim to keep inflation around a target of 2 per cent, and we usually try to accomplish this over six to eight quarters. Even in the absence of financial stability threats, the practice of monetary policy requires the central banker to deal with vast amounts of uncertainty.
Think of the most important aspects of a macroeconomic model – the level and growth rate of potential output, the real neutral interest rate, and the transmission of terms-of-trade shocks. None of these can be observed; they all must be estimated. The assumptions that we make in running our models inject uncertainty throughout the policy-making process.