benigno and woodford ( 2004 ) both take up the ehl challenge. for example, canzoneri, cumby, and diba consider further complications of the sticky - price, sticky - wage model, including capital investment and habit formation in consumption, while benigno and woodford explore the case in which the steady state of the model is not pareto optimal, as assumed by ehl. this progressive analysis of the implications of alternative assumptions is part of what thomas kuhn called “ normal science. ” the insights from these types of modeling efforts are already informing policy analysis at the board, and their influence will only grow as they become more detailed and realistic. a second important area, one that will always be central to monetary policy, is macro forecasting. because monetary policy works with a lag, the ability of policymakers to stabilize the economy depends critically on our ability to peer into our cloudy crystal balls and see something resembling the future. one of the key variables to be forecast is inflation. a variety of approaches to forecasting inflation are used at the board, of course. one of dick porter ’ s many contributions was to develop a monetary approach to forecasting inflation at medium - term horizons. dick ’ s so - called p - star approach, originally developed with jeffrey hallman and david small and updated in a 2000 paper with athanasios orphanides, combines simplicity with insight. porter ’ s analysis begins with an equation so basic that, at one time at least, it appeared on the california license plate of milton friedman ’ s personal automobile. that equation is of course the quantity equation, mv = py, or money times velocity equals the price level times output. this equation can be used to define a link between money growth and inflation that depends on the evolution of the velocity of money. hallman, porter, and small ( 1991 ) analyzed the predictive power of that relationship under the assumption that m2 velocity is a constant - an assumption that seemed reasonable at the time they wrote, but, as these things are wont to do, broke down soon after they did their initial work. orphanides and porter ( 2000 ) have developed a more sophisticated version of the p - star model, which employs information about the opportunity cost of holding m2 to track the evolution of equilibrium m2 velocity. this approach seems to work reasonably well at predicting inflation at medium - term horizons, and the forecasts of this model are reported routinely to the board of governors. of course, something

better understanding of the options it faces with respect to alternative ways of carrying out the federal reserve ’ s mission, and a clearer basis for deciding on priorities. payments system study a major study of the federal reserve ’ s role in the payments system, currently underway, is another example of strategic planning with respect to a major portion of the federal reserve ’ s activities, under the general umbrella of the strategic planning framework. since payments technology and the structure of the financial services industry are changing rapidly, it seemed important to focus both on how the payment system was evolving ( and should evolve ) and what role the federal reserve should play in that evolution. the united states is amazingly dependent on paper checks - - americans wrote 64 billion checks in 1996 - while most of the industrial world is shifting rapidly to more efficient electronic based payments. the study, directed by a committee of two governors and two federal reserve bank presidents, has drawn on analytic resources across the federal reserve system and outside. we began by examining the consequences of substantially altering the role of the federal reserve in the retail payments system ( checks and wire transfer system know as ach ). we analyzed the impact of scenarios ranging from withdrawal of the federal reserve from the check and ach markets to more aggressive leadership by the federal reserve in making the payment system more efficient and less dependent on paper. to get maximum input from the participants in the payment system - - banks, clearinghouses, vendors, consumers and others - - in helping us assess alternatives for the future, we held a series of “ forums ” around the country in may and june. we had enthusiastic and extremely helpful participation from a wide range of institutions. we learned a lot from the process and are now reassessing the alternatives, conducting additional analyses and preparing to present preliminary options to the board. i look forward to sharing the study with this committee. the payments area is a good example of the dilemma posed for planners by rapid technological change. while rapidly evolving technology makes focussing on future options imperative, it also makes it extremely important to remain flexible. laying out a blueprint for the payments system of the next ten or even five years, and rigidly following it, would almost certainly be a mistake. the technology is moving so rapidly that investments made now may well be obsolete in a short time. performance measures a major theme of gpra is the identification of specific measures of performance of projects and programs which can be used to evaluate their effectiveness. as in most organizations, performance measurement at the federal reserve is