Multiplier uncertainty

rdf:langString Multiplier uncertainty

rdf:langString In macroeconomics, multiplier uncertainty is lack of perfect knowledge of the multiplier effect of a particular policy action, such as a monetary or fiscal policy change, upon the intended target of the policy. For example, a fiscal policy maker may have a prediction as to the value of the fiscal multiplier—the ratio of the effect of a government spending change on GDP to the size of the government spending change—but is not likely to know the exact value of this ratio. Similar uncertainty may surround the magnitude of effect of a change in the monetary base or its growth rate upon some target variable, which could be the money supply, the exchange rate, the inflation rate, or GDP. There are several policy implications of multiplier uncertainty: (1) If the multiplier uncertainty is uncorrelated with additive uncertainty, its presence causes greater cautiousness to be optimal (the policy tools should be used to a lesser extent). (2) In the presence of multiplier uncertainty, it is no longer redundant to have more policy tools than there are targeted economic variables. (3) Certainty equivalence no longer applies under quadratic loss: optimal policy is not equivalent to a policy of ignoring uncertainty.