on its credibility and on the public ’ s expectations. more study leading to a better understanding of the linkage between central bank actions and expectation formation should improve the ability of central banks to achieve society ’ s inflation and output objectives more effectively under a variety of circumstances, including in a severe negative shock of the type we recently experienced. conclusion many central bankers and economists, myself included, were a little complacent coming into the crisis. we thought we knew enough about the basic structure of the markets and the economy to achieve economic and price stability with relatively minor perturbations. and we thought we had the tools necessary to deal with liquidity shortages and maldistributions. the reality is that we didn ’ t understand the economy as well as we thought we did. central bankers, along with other policymakers, professional economists and the private sector failed to foresee or prevent a financial crisis that resulted in very serious unemployment and loss of wealth around the world. we must learn from our experience. the questions i ’ ve posed are tough, but addressing these issues successfully should enable central banks to reduce the odds of future crises and respond more effectively to any bouts of instability that still might arise.

alan greenspan : risk and uncertainty in monetary policy remarks by mr alan greenspan, chairman of the board of governors of the us federal reserve system, at the meetings of the american economic association, san diego, 3 january 2004. * * * this morning i plan to sketch the key developments of the past decade and a half of monetary policy in the united states from the perspective of someone who has been in the policy trenches. i will offer some conclusions about what i believe has been learned thus far, though i suspect, as is so often the case, the passing of time, further study, and reflection will deepen our understanding of these developments. this is a personal statement ; i am not speaking for my current colleagues on the federal open market committee ( fomc ) or the many others with whom i have served over these many years. 1 * * * the tightening of monetary policy by the federal reserve in 1979, then led by my predecessor paul volcker, ultimately broke the back of price acceleration in the united states, ushering in a two - decade long decline in inflation that eventually brought us to the current state of price stability. the fall in inflation over this period has been global in scope, and arguably beyond the expectations of even the most optimistic inflation fighters. i have little doubt that an unrelenting focus of monetary policy on achieving price stability has been the principal contributor to disinflation. indeed, the notion, advanced by milton friedman more than thirty years ago, that inflation is everywhere and always a monetary phenomenon is no longer a controversial proposition in the profession. but the size and geographic extent of the decline in inflation raises the question of whether other forces have been at work as well. i am increasingly of the view that, at a minimum, monetary policy in the last two decades has been operating in an environment particularly conducive to the pursuit of price stability. the principal features of this environment included ( 1 ) increased political support for stable prices, which was the consequence of, and reaction to, the unprecedented peacetime inflation in the 1970s, ( 2 ) globalization, which unleashed powerful new forces of competition, and ( 3 ) an acceleration of productivity, which at least for a time held down cost pressures. i believe we at the fed, to our credit, did gradually come to recognize the structural economic changes that we were living through and accordingly altered our understanding of the key parameters of the economic system and our policy stance. the central banks of other industrialized countries have