challenge would be less formidable if the structure of the u. s. economy remained fairly constant over a sufficiently long period of time. in that case, a reasonably good estimate of the natural unemployment rate – the unemployment rate consistent with maximum sustainable employment – could be obtained from the actual long - term average rate of unemployment, and one could similarly estimate the path of potential output by fitting a trend to actual gross domestic product ( gdp ) data. in fact, however, such estimates can be highly misleading because the structure of the u. s. economy is highly dynamic and evolves almost continuously over time. in particular, over the past few decades the natural unemployment rate and the path of potential output have apparently moved around quite substantially. if we do not recognize the potential for such shifts, they can pose serious pitfalls for the conduct of monetary policy. it is difficult to gauge these structural changes even with the benefit of hindsight, and it is even more difficult to recognize such developments when they occur. for example, most economists now agree that the natural unemployment rate shifted upward in the late 1960s and that potential output growth shifted downward after 1970. however, perhaps because these shifts were not generally recognized until much later, monetary policy in the 1970s seems to have been aimed at unsustainable levels of output and employment, and hence policymakers may have unwittingly contributed to a series of boom - bust cycles as well as accelerating inflation that reached double digits by the end of the decade. and although subsequent monetary policy tightening was successful in bringing inflation back under control, the toll was a severe recession in 1981 - 82, which pushed up the unemployment rate to around 10 percent. the opposite problem occurred in the second half of the 1990s, when the common view among economists was that the natural rate of unemployment was near 6 percent. when the actual unemployment rate dropped close to 4 percent, and the economy was growing at a rate that many economists viewed as unsustainable, there were widespread calls for the fed to raise interest rates to prevent an acceleration in inflation. under chairman greenspan's leadership, however, the federal reserve resisted these views because it did not see inflation pressures developing and questioned whether the common estimate of the natural rate of unemployment was correct. the result was that the fed did not tighten monetary policy, and the economy reaped the benefits of the new economy : very low levels of unemployment and a modest decline in the inflation rate. attempting to anchor a particular rate of growth of output and employment

##bilities. such possible outcomes tend naturally to get some weight when policymakers perceive that events are not necessarily a product of linear relationships among variables and that welfare is not always defined by the linear quadratic utility function that theorists find convenient to use. in chairman greenspan ’ s risk - management paradigm, low - probability, high - impact events are always factors in the calculus of monetary policy. 2 this approach recognizes that “ impact ” is the product of two separate distributions - one for expected economic outcomes and one for the effect of those outcomes on welfare - that may be nonlinear. the two are closely related but not identical, and their relationship may well depend on the situation. in large part, central banks have been able to shift their attention more toward events in the tails of the probability distributions of possible outcomes because the centers of the distributions of key macroeconomic variables have been so much better behaved than they were a few decades ago. inflation has been low and stable in most economies, expectations that inflation will remain contained are much better anchored, and output fluctuations have been damped. this favorable economic climate has reduced the risk that temporarily aiming somewhat away from hitting objectives dead on will engender behaviors, like rising inflation expectations, that could have seriously adverse and destabilizing consequences for the economy. in effect, the cost of “ buying insurance ” against events in the tail has been greatly reduced. vincent reinhart provided valuable ideas and comments. alan greenspan ( 2004 ), “ risk and uncertainty in monetary policy, ” the american economic review, vol. 94 ( may ), pp. 33 - 40. buying insurance may also have appeared more attractive in recent years because the impact of tail events, especially those associated with financial markets, may have increased, even if their probability remains low. as wealth rises relative to income and more of the populace owns significant quantities of assets, wealth becomes an increasingly important factor in shaping spending decisions. in addition, the secular decline in the cost of financial transactions has facilitated balance sheet adjustments by businesses and households, potentially heightening their responses to financial market developments. although a whole range of possible events with varying probabilities and effects can be taken into account by monetary policymakers, the influence of possible low - probability events is most evident when serious instability is a much greater threat than usual. it is in these circumstances that the distribution of possible outcomes is skewed noticeably, and the effect of a given outcome itself may also be especially large. guarding against such a low - probability