Brainard’s uncertainty principle can also be applied to this type of uncertainty. If there is uncertainty as to whether there has been a shift in a longterm trend, the central bank should rely more on historical correlations that are more certain. The more uncertain the most recent observations are considered to be, the greater the weight that should be given to historical correlations and the more cautious the central bank should be in its actions. 23 It would of course be practical if Brainard’s uncertainty principle was entirely general and could be applied to all types of uncertainty, but unfortunately this is not the case. 24 Two important exceptions – which have both been applicable to the Riksbank’s monetary policy in recent years – are worth mentioning. The first concerns the shift in long-term inflation expectations. We had a situation in 2014– 2015 when expectations began to fall below the inflation target of 2 per cent. In such a scenario the central bank should act more aggressively to anchor expectations to the target. An overly cautious monetary policy risks reducing confidence in the target. It was therefore necessary to conduct an aggressive and strong monetary policy that reduced this risk and quickly restored confidence in the inflation target. The second exception concerns when the policy rate is close to the effective lower bound. I am sure you remember that the Riksbank and other central banks around the world cut their policy rates very quickly when the financial crisis struck in 2008.
The latter approach is called “certainty equivalence” in academic research and is a good policy only under fairly restrictive assumptions of how the economy functions. It is therefore probably less useful as guidance in policy-making. Moreover, the central banks’ actual behaviour and communication indicate that uncertainty plays an important role in the monetary policy decisions. 21 See Greenspan (2003). 20 [24]  A more useful approach is probably William Brainard’s insight that monetary policy should be conducted more cautiously when there is considerable uncertainty over its impact. 22 Brainard’s uncertainty principle is based on the insight that central banks’ actions can affect the uncertainty in the economy. If, for instance, a central bank were to act more forcefully to try to attain its inflation target more promptly – in a scenario where there is great uncertainty over the impact of monetary policy – there is a risk that it would instead miss the target by a wide margin. By acting forcefully, the central bank contributes to greater variations in inflation and also to greater uncertainty in general. To avoid this, the central bank should act more cautiously. This uncertainty principal is often referred to by central banks and can be one reason why central banks, who want to avoid making major mistakes in all circumstances, are sometimes perceived as “sluggish” in their behaviour. One of my themes today has been long-term trends. When such trends change, it often takes a long time before one notes the change and this can moreover be difficult to assess.