Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said central bankers should use probabilities of outcomes derived from financial-market prices in their policy making.
“Policy makers need some way to gauge the relative likelihood of future events,” Kocherlakota said today in slides prepared for a speech in New York. “For policy makers that care about social welfare, the relevant probability is a risk-neutral probability.”
The Minneapolis Fed chief spoke at a conference on extracting and understanding the risk neutral probability density from options prices at New York University’s Stern School of Business. He did not comment on the outlook for the U.S. economy or monetary policy in the slides of his remarks today.