Fluctuating volatility impacts monetary policy, risking suboptimal interest rates.
The article explores how changes in economic uncertainty affect people's tendency to save money for emergencies. By studying a model that considers varying levels of volatility in the economy, the researchers found that ignoring these fluctuations can lead to setting interest rates at the wrong level. This mistake, known as 'policy bias', is more significant when people have strong habits of saving. This is because habits make people more cautious, increasing the impact of uncertainty on inflation and economic growth.