Philip N Jefferson: Elevated economic uncertainty - causes and consequences

Keynote address (virtual) by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the Third High-Level Conference on Global Risk, Uncertainty and Volatility, jointly organised by the Swiss National Bank, Bank for International Settlements and the Board of Governors of the Federal Reserve System, Zurich, 14 November 2023.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
15 November 2023


Thank you for the opportunity to speak with you today. I am very much attuned to the important work that you're doing on uncertainty. Indeed, as a monetary policymaker, the subject is rarely far from my mind. It's not a new subject, of course. John Maynard Keynes and Frank Knight provided book-length treatments of the subject a century ago (Keynes, 1921; Knight, 1921). In addition, in 2003, Alan Greenspan observed, "Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape" (Greenspan, 2003).

Before I begin, let me remind you that the views I express today are my own and are not necessarily shared by my colleagues in the Federal Reserve System.

My plan is to talk about recent advances in how to measure uncertainty, what may cause uncertainty, what effect uncertainty may have on economic outcomes, and the conduct of monetary policy in the presence of uncertainty.

Defining and measuring uncertainty

Uncertainty is not directly observable in the same way inflation and economic output are observable. It is therefore more difficult to measure. To complicate matters further, there are three related concepts that are often used interchangeably: risk, volatility, and uncertainty. According to Frank Knight, risk describes a situation in which the outcome is unknown, but the probability distribution governing that outcome is known. Volatility, often used synonymously with risk, is a statistical measure of the variation in observed outcomes. In contrast, uncertainty is characterized by both an unknown outcome and an unknown probability distribution. These concepts are used interchangeably, in part, because empirically it can be difficult to identify them separately, and because they all capture aspects of what policymakers do not know when making decisions. Therefore, the uncertainty measures I will discuss are a mixture of these three concepts, and a theme for me will be the necessity of monetary policymakers to consider what they don't know in their decisionmaking, an argument often attributed to Friedrich Hayek (1974).