But the analysis implies that the optimal policy rule – defining how the policy rate should respond to economic developments – does not change if and when the degree of uncertainty in the economy increases. My impression is that this result did not sit comfortably with monetary policymakers. And – as is often the case in the academic literature – a result proving something did not matter proved to be the catalyst for a research agenda seeking to demonstrate that it did. Engineering again provided some of the inspiration for this research programme. But different strands of the engineering literature were taken up, which – when filtered through the macroeconomic lens – offered different implications for monetary policy. One strand of research developed from so-called Brainard uncertainty.13 If uncertainty entered the system via the parameters of the economy, rather than as shocks to the economy, then the consequences were different. For example, if the slope of the Phillips curve governing the relationship between inflation and unemployment were uncertain, then the Brainard view implied that the monetary policy response should be attenuated relative to the case when such uncertainty were absent. And the greater the uncertainty about the slope, the greater the attenuation required. The intuition behind this result is reasonably straightforward. Uncertainty about the slope of the Phillips curve introduces scope for the monetary policy response to any specific shock to be mis-calibrated. That mis-calibration threatens to introduce additional volatility into the inflation outlook beyond that created by the shock itself.
Second, I worry that taking unusually large policy steps may validate a market narrative that Bank policy is either foot-to-the-floor on the accelerator or foot-to-the-floor with the brake. This narrative was fuelled by the (perhaps necessarily) activist responses to the onset of global financial crisis and pandemic.26 It is not unique to the UK. In my mind, the perceptions underling this narrative may help to explain both markets’ reluctance to price in policy tightening in the middle of last year and the subsequent relatively rapid steepening of the money market yield curve of late as central banks have embraced the need to address inflationary pressures. And such perceptions can shape reality. If such swings in market sentiment and expectations were to weaken central banks’ ability to steer the market rates of most relevance to spending and investment decisions, then the transmission of monetary policy will be at risk. Of course, there may be occasions where aggressive monetary policy actions are necessary. Recent history is littered with them: the global financial crisis and onset of the pandemic are cases in point. I would certainly not wish to rule out changes in Bank Rate of more than the usual 25bp in all circumstances. 13  All speeches are available online at www.bankofengland.co.uk/news/speeches  13  Retaining flexibility is important. And given the inflationary pressures we currently face, I can certainly understand why colleagues on the MPC voted for a 50bp hike last week.