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environment of uncertainty. Sometimes, for instance, it is not unambiguously clear for
central banks how to interpret new incoming macroeconomic data. Moreover, there are
uncertainties about the concise monetary transmission mechanism. However, our
empirical results indicate that the fog of uncertainty has indeed become denser due to
structural changes in the transmission process between global and national variables.
Among other common forces, this seems to be also true for global liquidity, which has an
increasingly stronger effect on monetary aggregates in some but not all countries. This
“Knightian uncertainty” or model uncertainty may have significant implications for the
behavior of central banks.
According to the Brainard conservatism principle, uncertainties about major
model parameters can change the incentives facing central bankers, thereby leading them
to use their policy instruments less vigorously. The reason is that uncertainties about the
elasticity between global and national money is amplified into the economy the more
monetary policy reacts to this relation. Since the Brainard conservatism introduces a
motive for caution in optimal central bank behavior, financial globalization and its
corresponding structural changes may be important reasons for central banks not fighting
against strong rises in monetary and credit aggregates in the last few years.
In contrast, Borio and Filardo (2007) explain excessive monetary policy
accommodation not by rising uncertainties but by favorable supply side developments
triggered by globalization. This in turn dampened inflationary pressure and allowed the
reduction of short-term interest rates to exceptionally low levels. If structural breaks and
the higher potential for making mistakes make up for the underlying reasons for too
prudent central banks behavior, it is not clear whether this will change in the years to
come. Both financial markets and the global economy may undergo even more profound
modifications after the unprecedented financial crisis.
Our fourth policy conclusion concerns the question of the optimal design of
monetary policy among interdependent economies. Should open “spillover-driven”
economies adopt rules designed to fit specific features of more open and more closed
economies? This is old wine in new bottles and is closely related to the popular debates