Experience, judgement and the acknowledgement of uncertainty are key parts of that environment, and key parts of the policy maker’s outlook. To help assess economic developments and to facilitate policy discussion, though, central banks use a variety of macroeconomic models and econometric tools. Despite the sophisticated tools and analysis at our disposal, the uncertainty underlining the policy environment is pervasive.
Accordingly, I believe policy makers must show humility in their understanding of how the economy works, and how policy works. Before the financial crisis many distinguished policy makers and academics treated economics and finance as if it had attained something of a natural science – replete with regularities upon which most economists could, and seemingly did, agree.