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Monetary Policy and the Management of Uncertainty: A Narrative Approach

Monetary Policy and the Management of Uncertainty describes an eighteen-month pilot research project funded by Rebuilding Macroeconomics in collaboration with the Bank of England. My colleagues and I argue:

1. Academic macro offers less help or understanding to monetary policy makers than might be supposed.

2. Curiosity about, rather than wilful blindness towards, Radical Uncertainty can advance macroeconomics from its current state.

3. Narrative theories drawn from the social and psychological sciences, are quite different to those introduced by Shiller and others, and can explain and help.

4. The unique practical value of the Bank of England Agency Network to policy makers could be enhanced, if certain epistemic tensions were resolved.

Our paper rests on the idea economies are dynamic and evolving. The “true” model driving them is, therefore, unknowable ex ante. Consequently, decision makers face radical uncertainty. It means that whatever models they use to make sense of available data to give them a sense of knowledge of “what is going on here”, however skilful, can only be based on debateable imaginaries.

Macro Theory and Monetary Policy:

The academic literature on monetary policy rules has emphasised the importance of expectations. But the validity of any given rule depends upon the model of the economy that underlies it being true. The calculation of the rule – or policy reaction function – is extraordinarily complex. Moreover, the complexity of the decision rule is increased enormously when the possibility of learning about the true model is introduced. Because our understanding of the economy is incomplete and constantly evolving, it means that monetary policy in practice is characterised by a continuous process of learning embedded, in the case of the Bank of England, in the rounds of meetings and forecasts that are the daily life of the Monetary Policy Committee.

We describe two aspects of the MPC’s work:

One is to assess where the economy is and where it is going, with and without intervention. But how? Accurate statistical series lag the present. Projection forward from the past is radically uncertain.

Standard macro has evolved a set of fixed relationships and semi-automatic rather than human processes for restoring equilibrium, but provides no theory of knowledge: how economic actors know how to adapt to what is going on. We argue policy-makers perform this task like humans generally mainly by fitting data they are offered to their preferred story of what is happening and what will happen – relying on their informed guesses about the current model. In other words, what they do in their meetings is to choose a narrative.

A second aspect of the MPC’s work, to which it devotes considerable effort and expense in the form of publishing extensive and associated minutes, lengthy reports and press conferences, is to communicate.

A modern inflation targeting central bank, therefore, uses words as well as a policy rule to achieve its ends. Because “practice [is] ahead of “theory” in this regard, this role for words is under theorised. We argue that it is important because in an inflation-targeting set-up, while the Bank makes monetary policy, it is people (consumers, businesses, financial markets, wage-setting negotiators) that carry it out. Expectations are coordinated not just by setting the price of money, but more fundamentally by communicating a policy supporting narrative. We argue that what is happening in this respect is that the MPC is constructing what we call a conviction narrative, a narrative aimed demonstrably to make sense of current economic conditions to economic actors and to convince them how policy will help the economy to evolve.

Radical Uncertainty and Narratives

Most economists use probability-based models to address questions of knowledge. The practice forces them effectively to ignore radical uncertainty and to overlook that narratives - structured hypotheses that make sense of the world, generate predictions about the future, and guide our actions – not probabilities, are the language of thought.

In this paper we conceptualise narrative through a social science lens and then use it to show how research into the practice of detecting and then communicating narratives might be central to any adequate understanding of the activity of an inflation targeting central bank.

The term “narrative” has a long history playing a major role in foundational works of philosophy and social and psychological theory. Whereas in economics, narratives have typically been viewed (as by Shiller) as alternatives to rational expectations, in the other sciences they are a central part of how people think, come to know and communicate – making sense of the world, envisaging alternate outcomes and creating a sense of actionable knowledge. So, while in economics, radical uncertainty seems to have been treated as presenting insoluble barriers to analysis, in social science, narratives, based on core elements of shared and networked social life and experienced via embodied cognition, provide actionable knowledge, support conviction and enable planning and coordination. They are particularly adapted to facilitate communication.

The Unique Role of the Agencies

Our observation and analysis of some of the annual conversations that the Bank of England’s Agencies have with 9,000 contacts in the regions suggests that what emerges is precisely the kind of narrative information that should be treated as reliable actionable knowledge about the way the economy is currently being performed and planned. The methods the Agents use to find causal structure in their data are impressive. Making a distinction between data (digits), information (data with theoretically defined meaning) and intelligence or knowledge (data about the model driving outcomes), which is new to economics, we argue they give the MPC as good knowledge as it is possible to have about the economy and its future. This because conversations are inherently forward looking focused on changing business plans and the obstacles contacts expected to face literally as they make the economy. As forward looking intelligence, it’s unique.


Currently there is some epistemic tension created between the dominant academic macroeconomic tradition in the Bank and the less well theorised narrative and uncertainty foundations we have mentioned, on which inflation-targeting practice is based. Narrative Theory aims to provide a theory of monetary policy and communication suited to the challenges of inflation targeting and radical uncertainty. We make the case for further experimental investment in conversational data and analysis.

We conclude that social science use of the concept of narrative and particularly “conviction narrative” theory and research based on it, can augment macroeconomics both generally

and specifically, allowing it to turn into a more precise real world orientated and useful policy science.

David Tuckett

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1 Comment

David Chester
David Chester
Jul 24, 2020

The writer of this article has obviously not properly learned nor understood about the function of money within our grand social system of macroeconomics. To look properly at the Big Picture requires a balanced view of where money and goods etc., flow, which is in opposing directions between the entities which (in turn) represent the functionaries performing the transactions. Banks and governments participate but there are 4 additional trading agents namely: landlords, households, producers and capitalists. When we take these as functional entities having different roles in the system rather than actual groups of people (who have many other kinds of activities and therefore would lead to much confusion, were we to try to include them together) we will find…

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