Uncertainty, structural change and monetary policy strategy - speech by Huw Pill

Speech

Thanks to Profs. Binner and Jayakody for their invitation to participate in this conference, to the Money, Macro and Finance Society for organising the event, and to the Birmingham Business School here at the University of Birmingham for hosting us all.

It is a great honour and privilege to deliver the Maxwell Fry Lecture.^[1]

Professor Fry was one of the leading figures in the field of money and finance in economic development. That literature was driven by four seminal contributors: Gurley, Shaw, McKinnon and Fry. I was fortunate to have the late Ron McKinnon as my doctoral supervisor in the early 1990s. As a result (and under the direction of Ron) I read and learned from many of Professor Fry’s papers – including, of course, his magnum opus ‘Money, Interest, and Banking in Economic Development’.^[2] While I was never fortunate enough to have been taught by Professor Fry myself, I certainly benefited from his knowledge and insight.

Professor Fry also directed the Bank of England’s Centre for Central Banking Studies in the mid- ‘90s, setting it on a path that – in my current role as responsible Director for the CCBS – we continue to benefit from.

So, both as an individual and as part of the wider economics community, and along both academic and policy dimensions, we have much to celebrate in the contribution of Professor Fry to our profession at this conference.

Today I seek to offer a view of how rapidly evolving economic circumstances – greater uncertainty, driven by a changing institutional context and structural transformation in the economy at both global and national levels – are influencing the design and implementation of monetary policy.

I do not intend to discuss the immediate economic and policy conjuncture – the monetary policy stance. Nor will I engage in the minutiae of central bank operations – monetary policy implementation. That is not to say that these are unimportant or uninteresting topics. But you cannot do everything in one lecture. And I have discussed them recently on other occasions.^[3]

Rather I will focus on the implications of underlying secular changes in the economy for monetary policy strategy.

This is well-trodden territory in the academic and policy literature. And I should warn you at the outset that I don’t have much to offer in terms of novelty.

Indeed, the main message of my remarks this afternoon is the following: in a world of radical uncertainty and deep structural economic change, more weight should be given to robust ‘eternal verities’ in running monetary policy, at the expense of pursuing fragile optimising approaches specific to a given set of often ephemeral circumstances.

If that sounds like a call for ‘conservative’ central banking – it is.^[4] The large economic literature extolling the benefits of conservatism at central banks is still relevant today.

But it is also a message that resonates with the seminal work of Maxwell Fry (1988) and his collaborators in the field of money and finance in economic development.

If we were to translate into more contemporary language, we might label that field macro, monetary and financial management in “emerging markets”.

The defining feature of an emerging market is its implementation of economic and financial reforms that fundamentally change both its internal institutional framework and its relationships with the rest of the world. In turn, those policy and institutional reforms prompt substantial changes in economic behaviour, and thus in the structure of the economy itself. Such initiatives both change and are intended to change the beliefs and expectation-formation mechanisms of firms, households, investors and entrepreneurs, ideally in ways that promote better economic performance.

The broad message of this literature is that market-oriented financial deepening can improve allocative efficiency, innovation and dynamism, as long as markets and banks are appropriately regulated and macroeconomic policies are stability-oriented and sustainable.^[5] This insight lay at the heart of Professor Fry’s work. It remains relevant for today – not just in emerging markets, but also in advanced economies.

For our purposes today, the read-across to a developed economy in the modern era is: Monetary policy should be resolutely focused on price stability, even as institutions evolve, economic structure changes and uncertainty rises around it.

At a time when the UK economy is …

• Facing substantial institutional change, owing (inter alia) to Brexit, regulatory initiatives following the global financial crisis, and ongoing disruptions in the international multilateral trading system;
• Experiencing – at least potentially – structural change in key economic sectors, notably in price and wage setting behaviour by firms, especially in the aftermath of the Covid pandemic;^[6] and
• Confronting the possibility that expectations formation may have shifted, with households and firms paying greater attention to inflation developments in taking spending and investment decisions, with some price changes proving more salient than others;

… the messages offered by Maxwell Fry and his colleagues in the field of money and finance in economic development are surely germane.

Long overlooked by conventional macro and monetary economists, that important but under-appreciated literature and the lessons it contains are long overdue a re-hearing in the monetary policy community (and elsewhere).

On a previous occasion, I defined a monetary policy strategy as a systematic mapping from developments in the economy (‘data’) into policy decisions (‘instrument settings’) in the pursuit of the policy objective (price stability).^[7]

Be reassured, I am not going to re-visit that discussion in its entirety. But a few points are pertinent today.

At a time when uncertainty about many other features of the economy is substantial, it is even more crucial that there is no ambiguity about the objective of monetary policy. Defining that objective must recognise the constraints imposed by economic logic. And to remain legitimate, the definition must serve wider welfare goals.

One of the ‘eternal verities’ that I mentioned is the classical dichotomy: we should be cautious in assigning monetary policy responsibility for real economic outcomes because, over the longer term at least, all monetary policy can do is determine the nominal dynamics of the economy.^[8]

Price stability over the medium term is therefore the appropriate objective for monetary policy: it is both achievable using monetary policy instruments and, by creating a stable environment conducive to efficient longer-term investment and spending decisions, supports the innovation and dynamism that drive productivity growth and improvements in living standards.

Alan Greenspan famously defined price stability as a rate of inflation that was low and stable enough not to influence firms and households’ economic decisions.^[9] The UK’s monetary policy framework takes this further, by defining an explicit 2% inflation target for a specific price index (the CPI), which holds at all times and penalises upside or downside deviations in a symmetric way.^[10] This quantitative target is clearer and simpler than Greenspan’s definition, provides a benchmark against which monetary policymakers can be held accountable, and has helped to anchor longer-term inflation expectations.

The benefits of the inflation targeting approach have been demonstrated by recent experience. By contrast with what was seen in the 1970s and ‘80s, the substantial external inflationary shocks to the UK economy in recent years have not triggered a de-anchoring of inflation expectations and a non-stationary upward drift in inflation outcomes. Rather there has been clear reversion towards the 2% inflation target – admittedly not complete as yet, but nonetheless the clear direction of travel identified by the MPC, reflecting the restrictive policy monetary policy stance it has implemented of late.

Viewed through this lens, introducing any ambiguity into the inflation target or the MPC’s commitment to achieving that target is simply adding unnecessary and undesirable noise to what is already an undesirably noisy economy. A simple, clear, stable and unambiguous mandate for monetary policy expressed via an inflation target has shown its value.

Or – to put this into the language that most macroeconomists have in the back of their minds when discussing monetary policy (however arcane this may seem to non-economists) – when there is uncertainty about other ‘starred variables’ defining the economy’s steady state – the natural rate of interest, R-star; the level of potential output, y-star; or the equilibrium unemployment rate, u-star – monetary policy makers must endeavour to eliminate any uncertainty about their own objective, the inflation target Pi-star, and their commitment to achieving it.

Ensuring clarity about the objective of monetary policy leaves open the question of what policy measures are needed to achieve it. This is where the systematic mapping from data developments and analysis to the setting of policy instruments plays its role.

While Governor of the Bank of England, Lord King (2005) offered one account of this mapping.^[11] In a benign world where institutions are durable, shocks are modest in size and the underlying structure of the economy is stable, policymakers and the private sector share a common view of the economy. Furnished with knowledge of the MPC’s reaction function and market participants’ forward assessment of the outlook for inflation, bond prices aggregate incoming economic information in a socially efficient way: in particular, in a manner that is consistent with – and serves the achievement of – the social objective of price stability. In this set-up, an inflationary shock is met by an off-setting re-pricing of monetary and financial conditions, which helps to stabilise inflation developments around target.

In other words, the credible commitment to an aggressive monetary policy response should inflation get out of hand induces behaviour that makes it much less likely that inflation will get out of hand. A virtuous, self-reinforcing cycle of stability is created.

But defining a systematic mapping from data to policy decisions is not only useful as a way of influencing the behaviour of those outside the central bank. It can also help structure, discipline and improve the discussions among and decisions of monetary policymakers.

In the end, policy decisions matter. Policymakers cannot rely entirely on expectational channels of monetary policy transmission – there will be occasions where they need to act.

Empirical macro models suggest that not all economic behaviour is forward-looking.^[12] And – as discussed at the recent Jackson Hole central bank symposium run by the Federal Reserve Bank of Kansas City^[13] – above-target inflation can be generated by real shocks to the economy (such as big shifts in the relative price of energy or food), as well as the nominal or expectational shocks that are more amenable to treatment by guiding private expectations.

The challenge is then to define how monetary policy should respond in this more uncertain environment – one characteristic of what former BoE Deputy Governor Ben Broadbent has labelled the NAsTY (Not As Tranquil Years) decade, in contrast with the NICE (Non-Inflationary Continuous Expansion decade) earlier identified by Lord King.^[14]

In particular, uncertainty about the underlying structure of the economy – when institutions are evolving, shocks are large and economic behaviour is changing – needs to be taken into account. In that context, policymakers and the private sector are unlikely to share a common view of the economy. Even as policymakers seek to reduce uncertainty about their objective (Pi-star), uncertainties surrounding other starred variables – such as the natural rate of interest (R-star) or the equilibrium unemployment rate (u-star) – come to the fore.^[15]

One important implication of this discussion is that monetary policymakers should make a clear and credible commitment to achieve their price stability objective, which should be expressed as explicitly and unambiguously as possible in the form of a quantitative, symmetric inflation target. Another implication is that policy decisions in pursuit of that objective should be taken in a systematic way, both to guide private expectations and to structure and discipline internal discussions among policymakers.

To conclude, I believe these elements are well embodied in the UK’s monetary policy framework and remain crucial to how we think about achieving our mandate on a daily basis.

The views expressed in these remarks are not necessarily those of the Bank of England or the Monetary Policy Committee.

I would particularly like to thank Kavya Saxena, Saba Alam, Lou Everett, Tim Munday, Adrian Paul,
Hannah Porter, and Ryland Thomas for their help in the preparation of these remarks.

The text has also benefitted from helpful comments from Andrew Bailey, Fabrizio Cadamagnani,
Shiv Chowla, Gosia Goralczyk, Clare Lombarelli, Catherine L. Mann, Ben Nelson, Martin Seneca and Tamarah Shakir for which I am most grateful.

Opinions (and all remaining errors and omissions) are my own.

References

Broadbent, B. (2024). “From NICE… to not so nice,” speech at the CCBS Workshop on monetary policy, Bank of England, 20 May.

Fry, M. (1988). Money, Interest, and Banking in Economic Development, Johns Hopkins University Press.

Galí, J., M. Gertler and D. López-Salido (2005). “Robustness of estimates of the hybrid New Keynesian Phillips curve,” NBER working paper no.11788.

Greenspan, A. (2001). “Transparency in monetary policy,” remarks at the Federal Reserve Bank of St. Louis Economic Policy Conference.

King, M.A. (2005). “Monetary policy: Practice ahead of theory,” Mais Lecture, Cass Business School.

McKinnon, R I. and Pill, H. (1997). “Credible economic liberalizations and overborrowing,” American Economic Review 87(2), pp. 189-203.

Nakamura, E., V. Riblier and J. Steinsson (2025). “Beyond the Taylor rule,” NBER working paper no. 34200.

Orphanides, A. (2001). “Monetary policy rules based on real-time data,” American Economic Review 91(4), pp. 964-985.

Pill, H. (2024). “Monetary policy strategy,” remarks at Cardiff Business School, 1 March.

Pill, H. (2025a). “The courage not to act,” remarks at the monetary policy briefing hosted by Barclays, 20 May.

Pill, H. (2025b). “On QT,” remarks at the Inaugural Pictet Research Institute Symposium, Geneva, 23 September.

Rogoff, K. (1985). “The optimal degree of commitment to an intermediate monetary target,” Quarterly Journal of Economics 100(4), pp. 1169–89.

Waller, C.J. (1992). “The choice of a conservative central banker in a multisector economy,”American Economic Review 82(4), pp. 1006–12. 

Notes

1. A formal lecture text (with more details on the analytical material underlying these remarks) will be published on the Bank of England website in due course. ↑

2. Fry (1988). ↑

3. Pill (2025a,b). ↑

4. Rogoff (1985); Waller (1992). ↑

5. McKinnon and Pill (1997). ↑

6. Pill (2025a). ↑

7. Pill (2024). ↑

8. There is a broad literature that tests the validity of monetary neutrality, and its stronger version monetary super-neutrality for example, Hanson and Stein (2015) and Nakamura and Steinsson (2018) ↑

9. Greenspan (2001). ↑

10. Under the UK legislation, the inflation target is set by the Chancellor of the Exchequer in an annual remit letter sent to the Governor of the Bank of England. In the language of the academic literature, the Bank of England’s MPC is therefore ‘operationally independent’ rather than ‘target independent’. ↑

11. King (2005). ↑

12. Gali, et al. (2005). ↑

13. Nakamura, et al. (2025). ↑

14. Broadbent (2024). ↑

15. This is discussed by Orphanides (2001). ↑