Building on the work of Michael Woodford in collaboration with my former colleague and mentor Julio Rotemberg (who very sadly passed away a few years ago),11 linear approximations of these models around the inflation target steady state, in conjunction with quadratic approximations of social welfare derived from the household preferences upon which the model was based, defined the system within which model-optimal monetary policy could be determined. Over the past quarter of century, a lot of ink has been spilt in academic journals, doctoral theses, and central bank working papers exploring the features and implications of this general framework in great detail. 5  All speeches are available online at www.bankofengland.co.uk/news/speeches  5  For those of us schooled in modern macro using Thomas Sargent’s Macroeconomic Theory textbook,12 this linear / quadratic (or LQ) framework was associated with one important result: certainty equivalence. In other words, within the LQ set-up defined by Rotemberg and Woodford, the optimal monetary policy rule governing how the policy interest rate should respond to changes in the state of the economy is invariant to distribution of shocks to that economy. This does not mean that uncertainty does not matter. On the contrary, shocks are the drivers of economic fluctuations. The welfare losses associated with inflation volatility stemming from those shocks provides a rationale for the stabilisation of inflation that underlies the adoption of inflation targeting.
The latest forecast took note of the global slowdown and foresaw a precarious recovery. Overall, at global level, it looks like we are facing a slowdown at the end of a long expansion rather than an outright downturn. However, uncertainty is rising markedly: trade tensions, geopolitical risks across the globe, political risks in Europe, etc. This makes the current juncture harder to navigate. In the US, the macroeconomic outlook has led the Fed to, somehow, pause in its normalization process. In emerging markets, potential problems could be brewing as geopolitical issues (from trade tensions to Middle East developments) are compounded with financial fragilities. Europe also has its fair share of uncertainties, with a few risks still unresolved. The macroeconomic outlook remains uncertain: last year slowdown was mostly driven by idiosyncratic developments but their consequences over the next quarters and, more broadly, the influence of the global slowdown are still unclear. According to the latest projections of the Eurosystem, GDP growth in the euro area would decelerate significantly in 2019 at 1.2% (after 1.8% in 2018) before gradually increasing to 1.4% 1/4  BIS central bankers' speeches  in 2020 and in 2021. This deceleration is mainly driven by Germany and by Italy. The Brexit situation is unsettled.