expanded its balance sheet. but it is important to understand that this expansion need not trigger inflation now or in the future, because the federal reserve can now pay interest on bank reserves. going forward i ’ ve spent most of this speech looking back. let me close by offering some thoughts about future policy. i ’ ve underscored the federal reserve ’ s success in meeting its price stability mandate over the past four years. and the fed ’ s actions have helped keep unemployment from rising higher. but the unemployment rate, currently 9 percent, remains disturbingly high – and fomc meeting participants are projecting that it will fall to only about 8 percent over the next two years. the fomc does have tools remaining. it could put downward pressure on long - term market interest rates in at least two ways. first, it could buy more long - term treasury securities or securities issued by government - sponsored enterprises like fannie mae and freddie mac. bis central bankers ’ speeches second, the committee could extend its prediction for how long it will keep its target shortterm interest rate exceptionally low. so, tools – and choices – remain. however, the fomc should do more than simply decide at each meeting whether or not to buy more assets or to keep interest rates low for longer. any current decision is based on the fomc ’ s forecast of the future, and no forecast can be perfect. the committee should provide a public contingency plan – that is, provide clear guidance on how it will respond to a variety of relevant scenarios. for example, the committee recently projected that in 2011, core inflation will be 1. 9 percent and that it will fall back in 2012 and 2013 to around 1. 7 percent. suppose hypothetically that core inflation, and the outlook for core inflation, has risen to 3 percent by the end of 2013, while unemployment has fallen to between 8 percent and 8. 5 percent. a public contingency plan would allow the public to know what the committee intends to do in that eventuality. i believe that this kind of public contingency planning will have many benefits. let me mention two. first, in recent statements and speeches, i have described why the fomc actions in august and september seemed inconsistent with the evolution of the macroeconomic data in 2011. this kind of inconsistency is much less likely to occur once the fomc has formulated an explicit public contingency plan. second, i ’ ve heard from businesses

engaged in the same increased production, without the results of that increased production ever being used in the act of war. second, the recoveries persisted well after the end of the war ( and indeed proved to be essentially permanent ). the final reason is theoretical : the usual modeling of aggregate resource constraints implies that rapid increases in aggregate inputs and outputs are in fact physically possible. i will spend the rest of my discussion on this last perspective and its implications. the typical macroeconomic model is based on an aggregate production function that is unbounded from above and increasing with respect to labor and capital. hence, given this function, it is possible for output to increase rapidly as long as the labor input increases sufficiently. in a similar vein, aggregate models of physical capital accumulation typically assume that the future capital stock is an unbounded and increasing function of physical investment. according to this formulation, it is possible for the capital stock to rise rapidly, as long as physical investment increases sufficiently. thus, the typical aggregate models imply that it is physically possible for future u. s. economic activity to be distinctly higher than what might be expected to unfold. this implication means that these models give rise to the following key policy question : is the united states willing to pay the costs required to generate that materially higher path for economic activity? it is important to be clear about the meaning of the term “ costs. ” as a society, we can only increase labor input by forgoing leisure and home production. and as a society, we can only increase investment by increasing labor input or by reducing consumption. hence, i see the following as the key policy question : is the united states, as a society, willing to forgo the leisure, home production, and / or near - term consumption required to generate materially higher future economic activity? i don ’ t see this question as one that i can answer using my tools as an economist. rather, i see it as a social choice problem that can only be resolved through a collective decision by americans. but let me stipulate, for the purposes of this discussion, that americans are collectively willing to give up leisure and consumption so as to generate a higher path for future economic activity. what policy choices should be made so as to ensure that higher path actually materializes? this second, technical, question can be answered – at least in the abstract – through the tools of public finance. consider some feasible allocation. what prevents that feasible allocation from emerging as an equilibrium outcome