the expected rate of increase of aggregate supply, which increase can be more easily predicted. this version of the taylor rule goes back to the spirit of martin ’ s initial remark, where the monetary authority is happy with the cocktail party temperature at present but moves against anything that increases its warmth. should demand growth threaten to outrun supply growth ( the party to warm up ), the seeds of accelerating inflation may be planted and monetary policy should curb the growth of demand by raising interest rates. should demand growth threaten to fall behind supply growth, rising unemployment is probably in the works, and monetary policy should try to boost the growth in demand by lowering interest rates. as long as inflation and unemployment remain in the acceptable band, this change version of the rule simply tries to maintain a good thing, without requiring precise quantification of inflation and unemployment policy goals. this approach has not addressed the question of supply shocks, which are dealt with in the general formulation of taylor ’ s rule. but one can incorporate supply shocks into the change rule as well. if there are temporary supply shocks that do not seem likely to be incorporated into the broader inflation process, they should be ignored. if there are positive or negative shocks that do seem likely to be incorporated, the change rule may not work well, and one may have to go back to the general form of the rule. policy strategies this all amounts to what might be considered a stabilization policy strategy. given the flexible exchange rate regime, fiscal policy should be used to influence overall national saving, which is still lower than it has been for most of the postwar period for the united states. i personally would argue for a rise in national saving, especially in view of the likely increase in future government entitlement spending. but i would not argue for any of the recently suggested changes in budget procedures that are alleged to help in this process. on the monetary side, authorities should try to stabilize the economy without anticipating help from fiscal policy. generally this would involve following the dictates of the taylor rule, assuming that one can choose the equilibrium real funds rate and target values for inflation and unemployment. if not, and if both inflation and unemployment seem to be safely within their target bands, this policy could be simplified to a change form — in which interest rates are used to keep the growth in aggregate demand near the more easily predictable growth in aggregate supply.

are a number of policy changes that could in principle raise national saving, the tried and true method is through contractionary fiscal policy. higher budget surpluses imply lower public and / or private consumption and permit more funds to be devoted to capital investment. making the same point from another perspective, higher surpluses retire some of the outstanding public debt and free up more funds for investment. in this regard, the recent return of overall budget surpluses is most welcome, and it has already begun to raise national saving. the overall net national saving rate in the budget surplus year of 1998 was 7. 5 percent, significantly above the decade average for the 1990s, despite the fact that the personal saving rate fell. since contractionary fiscal policy is at the heart of the national saving issue, it is natural to seek out budget procedures that promote saving. one, used by many national governments and most american states, is the convention of separating accounts into a current and capital budget. there would normally be restrictions against borrowing on current account, but not against borrowing to finance capital investment. while there have been arguments that the u. s. federal government should use a capital budget, such a change is unlikely to help promote saving in the present environment. one problem is that the federal government does remarkably little direct investment spending, so the current budget deficit or surplus would differ little from the overall deficit or surplus. and, at the present time the main policy issue is that the current budget is likely to run a surplus, in which case restrictions against current deficit spending would be irrelevant. countries that have come upon large petroleum resources have hit on another contractionary budget procedure. they have often devoted the resources to a special trust fund, insuring that the rise in income does not translate to a rise in consumption. for many years the united states has had a budgetary device that operates in a similar manner, involving its social security trust fund. while generally considered within the federal budget, social security has operated as a budget within a budget — being financed so that current and future payroll tax revenues are sufficient to cover the current and future benefits scheduled under present law, looking ahead for the next 75 years. several times in the past two decades this long run actuarial budget constraint for social security has been responsible for cuts in future benefits to bring the forward - looking social security budget into long term actuarial balance. many have argued for strengthening this separation by removing social security altogether from the federal government ’ s budget. in his proposed budget for year