Monetary Policy Under Uncertainty

Capítulo de Martín Redrado para el libro
The Oxford Handbook of Latin American Political Economy
editado por Javier Santiso y Jeff Dayton Johnson

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 1. Introduction

The intrinsic complexity of economic relations, i.e. the interconnection among the relevant variables, the changing behavior of the economic structure and the interpretation of the different phenomena by the economic agents, forces monetary policy to be developed in a highly uncertain world.

The analogy of the car driver is appropriate to describe the monetary policy process. In this analogy, the economy is represented by the car, the monetary authority is the driver and policy actions are taps on either the brake or the accelerator. Accordingly, if the economy is running too slowly, then policy makers cut the interest rate (pressure on the accelerator), thereby stimulating aggregate demand. On the contrary, if the objective is to reduce the level of output, then the Central Bank switches to the brake by raising the interest rate.