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Abstract "This paper explores the extent to which Knightian uncertainty can explain why interest rates generally move in a sequence of steps in a given direction, or remain constant for some time, rather than experiencing the frequent policy reversals that commonly arise from optimal policy simulations. We categorise the types of uncertainty that have been explored to date in terms of the decision-making behaviour they imply. We conclude by suggesting that one formalisation of Knightian uncertainty is more intuitively appealing, in the context of monetary policy, than formalisations that have been previously used. Within a very simple optimal control problem, we show that our preferred formalisation can deliver interest rate paths with periods of no change, and with some modifications, can generate paths of interest rates strikingly similar to those observed in practice."

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