. on the issue of uncertainty about the state of the economy, bill's work continues to provide fundamental insights regarding the choice of policy instrument. money demand relationships were relatively stable through the 1950s and 1960s, but, in the wake of dramatic innovations in banking and financial markets, short - term money - demand relationships became less predictable, at least in the united states. as a result, consistent with the policy implication of bill's 1970 model, the federal reserve ( like most other central banks ) today uses the overnight interbank rate as the principal operating target of monetary policy. bill's research also raised the possibility of specifying the operating target in other ways, for example, as an index of monetary or financial conditions ; and it provided a framework for evaluating the usefulness of intermediate targets – such as core inflation or the growth of broad money – that are only indirectly controlled by policy. more generally, the task of assessing the current state of the economy remains a formidable challenge. indeed, our appreciation of that challenge has been enhanced by recent research using real time data sets. 1 for example, athanasios orphanides has shown that making such real - time assessments of the sustainable levels of economic activity and employment is considerably more difficult than estimating those levels retrospectively. his 2002 study of u. s. monetary policy in the 1970s shows how mismeasurement of the sustainable level of economic activity can lead to serious policy mistakes. on a more positive note, economists have made substantial progress over the past decade in developing new econometric methods for summarizing the information about the current state of the economy contained in a wide array of economic and financial market indicators ( svensson and woodford, 2003 ). dynamic - factor models, for example, provide a systematic approach to extracting information from real - time data at very high frequencies. these approaches have the potential to usefully supplement more informal observation and human judgment ( stock and watson, 2002 ; bernanke and boivin, 2003 ; and giannone, reichlin, and small, 2005 ). the past decade has also witnessed significant progress in analyzing the policy implications of uncertainty regarding the structure of the economy. new work addresses not only uncertainty about the values of specific parameters in a given model of the economy but also uncertainty about which of several competing models provides the best description of reality. some research has attacked those problems using bayesian optimal - control methods ( brock, durlauf, and west, 2003 )

the formation of these expectations in the absence of full knowledge of the underlying structure of the economy. 2 for example, considerations of how the public learns about the economy and the objectives of the central bank can affect the form of the optimal monetary policy ( gaspar, smets, and vestin, 2006 ; orphanides and williams, 2007 ). furthermore, when the public is unsure about the central bank's objectives, even greater benefits may accompany achieving a stable inflation rate, as doing so may help anchor the public's inflation expectations. these studies also show why central bank communications is a key component of monetary policy ; in a world of uncertainty, informing the public about the central bank's objectives, plans, and outlook can affect behavior and macroeconomic outcomes ( bernanke, 2004 ; and orphanides and williams, 2005 ). conclusion uncertainty – about the state of the economy, the economy's structure, and the inferences that the public will draw from policy actions or economic developments – is a pervasive feature of monetary policy making. the contributions of bill poole have helped refine our understanding of how to conduct policy in an uncertain environment. notably, we now appreciate that policy decisions under uncertainty must take into account a range of possible scenarios about the state or structure of the economy, and those policy decisions may look quite different from those that would be optimal under certainty. for example, policy actions may be attenuated or augmented relative to the " no - uncertainty benchmark, " depending on one's judgments about the possible outcomes and the costs associated with those outcomes. the fact that the public is uncertain about and must learn about the economy and policy provides a reason for the central bank to strive for predictability and transparency, avoid overreacting to current economic information, and recognize the challenges of making realtime assessments of the sustainable level of real economic activity and employment. most fundamentally, our discussions of the pervasive uncertainty that we face as policymakers is a powerful reminder of the need for humility about our ability to forecast and manage the future course of the economy. references bernanke, ben s. ( 2004 ). " fedspeak ", speech delivered at the meetings of the american economic association, san diego, january 3, www. federalreserve. gov / boarddocs / speeches / 2004 / 200401032 / default. htm. bernanke ( 2007 ) and the references therein. _ _ _ _ _ _ _