deliver. it is widely accepted that there are three fundamental norms of macroeconomic performance, which i summarize as full employment, growth, and price stability, and these norms are a useful point of departure to thinking about the objectives for monetary policy. full employment can be interpreted as achieving the maximum sustainable level of employment and production. it basically means avoiding waste, in the sense of failing to use all the available productive resources. by sustainable, i mean the highest level of output that can be sustained without imposing unacceptable costs, a consideration i will return to shortly. by growth, i am referring to the desire to achieve both a high average level and rate of growth in living standards, on average, over time. we usually measure living standards in terms of real income per capita. we can be at full employment and yet be poor. we want to be at full employment and be rich. and we want our living standards to be improving over time. i ’ ll refer to the average rate of growth in output in the long run as the economy ’ s trend rate of growth. price stability refers to the stability of the overall price level, measured, for example, by the price index for overall output ( the chain - weighted price index of gdp ) or for consumer goods and services ( the consumer price index ). we often satisfy ourselves with the norm of low and stable - 2inflation. at any rate, price stability is really more an intermediate goal than an ultimate objective. the reason we care about price stability is that we believe that it contributes to a high and rising level of living standards. indeed, it is viewed as so important in this regard that we identify it as a separate and free - standing norm. and we will soon see we have particular reason to do so from the perspective of monetary policy. implications of economic theory i am going to assert some conclusions based on economic theory that help to understand the potential for monetary policy to achieve these objectives and the consistency among them. these conclusions are widely though not universally shared, but they do guide my views of what monetary policy can and should do. first, monetary policy cannot influence real variables - - such as output and employment - - in the long run ( except via the contribution of price stability to living standards ). this is often referred to as the principle of the neutrality of money. this proposition removes “ growth ” as an objective for monetary policy and also means that monetary policy cannot materially affect the level of output or employment corresponding to “

- border banking and international bond claims reported by the private sector to the bank for international settlements for the end of the first quarter of 2005, 41. 8 percent were in dollars and 39. 8 percent were in euros. adjusting for exchange rate changes, the dollar's share was 4 percentage points less than three years earlier, and the euro's share was more than 5 percentage points greater. 6 monetary authorities have been somewhat more inclined to hold dollar obligations. at the end of the first quarter of 2005, of the $ 3. 8 trillion equivalents held as foreign exchange reserves, more than three - fifths were held in dollars and approximately one - quarter in euros. since early 2002, the dollar's share has been little changed after adjusting for movements in exchange rates. allocation of capital lowers living standards everywhere. see martin feldstein and charles horioka ( 1980 ), " domestic savings and international capital flows, " economic journal, vol. 90, pp. 314 29. see footnote 1. bank for international settlements, cross - border locational statistics, bond database, and federal reserve board staff calculations. 3 / 5 what could be the potential consequences should the dollar's status as the world's reserve currency significantly diminish, especially if foreign investors reduce their rate of accumulation of claims on u. s. residents? most analysts would contend that u. s. interest rates were lowered by the world's accumulation of dollars. accordingly, in the event of a significant diminishing of the dollar's reserve currency status, u. s. interest rates would presumably rise. although i doubt that the u. s. dollar will lose its status as the world's reserve currency any time soon, there are, in my judgment, lessons to be learned from the experience of sterling as it faded as the world's dominant currency. sterling's status was at its height more than a century ago. great britain had net external assets amounting to some 150 percent of its annual gdp, most of which were lost in world wars i and ii. many wartime controls were maintained in the years immediately after world war ii. arguably these exacerbated the periodic sterling crises that hobbled britain in those years as much of the remnants of its empire endeavored to reduce their heavy reliance on holding sterling assets as central bank reserves and private stores of value. the experience of britain's then extensively regulated economy provides testimony to the costs of structural rigidity in times of