By Oliver Sauter

Oliver Sauter analyzes 3 elements of financial coverage below uncertainty. First he indicates that the phrases possibility and uncertainty are usually wrongly used as synonyms regardless of their various meanings. the second one element is the correct exam and incorporation of uncertainty right into a financial coverage framework. the writer undertakes systematization with a more in-depth examine every one pointed out kind of uncertainty. Thirdly, he specializes in the quantification of uncertainty from varied views, both from a marketplace standpoint or from a vital financial institution standpoint.

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Extra resources for Monetary Policy under Uncertainty: Historical Origins, Theoretical Foundations, and Empirical Evidence

Example text

Every action today changes immediately and inevitable the whole set up of possible future states like a picture in a kaleidoscope. These events that have not happened before, but are of such high importance are said to be crucial. For such events no probability relation can be given at all and uncertainty prevails. This is either due to the impossibility of measurement or due to the fact that a situation is not held to be contingent. Part II. Theoretical Foundations of Monetary Policy under Uncertainty 2.

Thereby, Tobin has paved the way for the rational expectation literature, whereby people act as if their subjective probability distribution equals the objective distribution. 1 of the previous chapter (Lucas 1977). In fact, what is not covered by rational expectation models is uncertainty arising out of the non-stationarity of the world, which includes situations or events which are not held to be contingent – like the occurrence of the black swan of Taleb (2008) (Davidson 2010). Knight’s and Keynes’s 1921 concept of uncertainty permits this non-stationarity (Meltzer 1982).

Like a game of chess, one move changes the whole progress of the game. There is no repetition under the same circumstances. , by tabbing instances. There is no chance of reaching a probability or frequency ratio for this class of experiments (Shackle 1949). In fact, as has been previously mentioned in both cases one might not be capable of predicting what might be the next outcome of a coin toss or a chess move. The difference, however, is that in the former case a coin toss would be just one element in a divisible series which can be aggregated.

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