Monday, March 22, 2010
King grapples with uncertainty
Posted by David Smith at 05:30 PM
Category: Thoughts and responses

Mervyn King has given a lecture to the Royal Society, based on this paper. The theme is about the inherent uncertainties involved in economic policymaking and in economic forecasting. It is sometimes said that economic forecasters were put on earth to make weather forecasters look good. The paper suggests that the parallels are closer than that. The Bank has got together with the Met Office to compare notes and both are suitably humble about their ability to foretell the future.

Some commentators will pick up on this, from the Bank's news release: "He [King] notes that it is possible to identify potential system vulnerabilities and determine the factors that contribute to potential instability. For example, many people, including at the Bank of England, did identify the vulnerabilities of the financial system before the crisis without being able to predict when or how the crisis would begin. He therefore says: “The key is for policymakers to focus on making the structure of the underlying system more robust to shocks. For example, in avalanche areas the snow may be ‘seeded’ so that, by inducing small avalanches, the chance of a large avalanche is mitigated. In the context of the financial system, policymakers could impose a ‘Glass-Steagall’ style separation between the payments system network and risky activities”.