Forecasts of global growth have historically been imprecise, punctuated by periods of optimism and pessimism. Inaccuracy in forecasting partly reflects quantifiable risks to the global outlook as well as economic uncertainty

In this paper, we derive a modification of a forward-looking Taylor rule, which integrates two variables measuring the uncertainty of inflation and GDP growth forecasts into an otherwise standard New Keynesian model. We show that certainty-equivalence in New Keynesian models is a consequence of...