, more predictable. 12 the huge inflow of foreign saving into the united states, undoubtedly, also has been important. as then - governor bernanke observed in 2005, differential demographic trends and rates of return on investment between the united states and many of the world ’ s other rich countries is part of the explanation for that inflow ( bernanke, 2005 ). rich countries, with populations that are aging faster than ours, have a strong motive to save to provide for an impending sharp increase in the number of retirees relative to the number of workers. moreover, many advanced economies outside the united states also have a paucity of domestic investment opportunities relative to the united states. as a consequence of high desired saving and low prospective returns to domestic investment, the mature industrial economies outside of the united states, as a group, seek to lend abroad. the higher prospective returns in the united states may be due in part to the higher productivity growth that the united states has been experiencing relative to many other industrialized countries resulting from the interaction effect of it innovations and the flexibility of the united states economy relative to other countries. what about the effects of a productivity shock on inflation? ultimately inflation is determined by the policy actions of the central bank. in the short run, however, a change in the trend growth rate of productivity can influence inflation dynamics. a one - time change in the level of productivity, or transitory volatility in productivity growth rates, are unlikely to have lasting effects on business pricing behavior. economic theory and econometric evidence suggest that only a persistent shock to the rate of change of productivity has persistent consequences for rate of change of prices - that is, inflation. if we lived in a world with no impediments to competition in labor and product markets, with prices and wages that freely and quickly moved up and down in response to shifts in economic conditions, then a change in productivity growth would be promptly matched by a corresponding change in nominal compensation per hour. as a consequence, unit labor costs would be unchanged, and all else equal, so would inflation. but, we don ’ t live in such a perfectly competitive, frictionless world. nominal compensation per hour initially seems to respond sluggishly to changes in the economy, including productivity shocks. as a result, an increase in productivity growth, for example, initially slows the growth of unit labor costs, which firms - under competitive pressure - then pass on to their customers, thereby slowing price inflation. as price inflation

may have been induced by improved monetary policies. that is, better monetary policies may have resulted in what appear to be ( but only appear to be ) favorable shifts in the economy ’ s taylor curve. here are some examples of what i have in mind. first, monetary policies that brought down and stabilized inflation may have led to stabilizing changes in the structure of the economy as well, in line with the prediction of the famous lucas ( 1976 ) critique that economic structure depends on the policy regime. high and unstable inflation increases the variability of relative prices and real interest rates, for example, distorting decisions regarding consumption, capital investment, and inventory investment, among others. likewise, the high level, variability, and unpredictability of inflation profoundly affected decisions regarding financial investments and money holdings. theories of “ rational inattention ” ( sims, 2003 ), according to which people vary the frequency with which they re - examine economic decisions according to the underlying economic environment, imply that the dynamic behavior of the economy would change - probably in the direction of greater stability and persistence - in a more stable pricing environment, in which people reconsider their economic decisions less frequently. second, changes in monetary policy could conceivably affect the size and frequency of shocks hitting the economy, at least as an econometrician would measure those shocks. this assertion seems odd at first, as we are used to thinking of shocks as exogenous events, arising from “ outside the model, ” so to speak. however, econometricians typically do not measure shocks directly but instead infer them from movements in macroeconomic variables that they cannot otherwise explain. shocks in this sense may certainly reflect the monetary regime. for example, consider the cost - push shocks that played such an important role in 1970s ’ thinking about inflation. seemingly unexplained or autonomous movements in wages and prices during this period, which analysts would have interpreted as shocks to wage and price equations, may in fact have been the result of earlier monetary policy actions, or ( more subtly ) of monetary policy actions expected by wage - and price - setters to take place in the future. in an influential paper, robert barsky and lutz kilian ( 2001 ) analyze the oil price shocks of the 1970s in this spirit. barsky and kilian provide evidence that the extraordinary increases in nominal oil prices during the 1970s were made feasible primarily by earlier expansionary monetary policies rather than by truly exogenous political or economic