##n ( 1997 ) and bernanke and others ( 1999 ). the following anecdote provides a measure of the extent to which some policymakers were pleasantly surprised by their central bank's success in keeping inflation in line with its objective. the governor of the bank of england must write an open letter to the chancellor of the exchequer when inflation deviates from the official target by more than 1 percentage point. about a year after the bank of england was granted operational independence, the bank's chief economist wrote that " [ even ] if inflation shocks were to disappear entirely, the continued presence of demand shocks would imply that [ open letters ] would still be triggered more than 40 percent of the time " ( bean, 1998 ). a decade later, inflation has remained within 1 percentage point of the target in all but a single month, or less than 1 percent of the time. shocks. nonetheless, these inflation deviations have been relatively small and transitory by historical standards. most important, there is little evidence of a systematic upward bias in inflation, which would arise if the central bank were attempting to stimulate output beyond what would be consistent with maintaining low and stable inflation. i also want to emphasize that this improvement in inflation performance has not been at the expense of higher employment and output fluctuations ; indeed, the variability of output and employment fluctuations has generally declined in those economies where the central bank has maintained an explicit inflation objective. 25 inflation expectations. economies with explicit numerical inflation objectives have ( fortunately ) not been alone in enjoying relatively low and stable inflation over the past couple of decades ; indeed, in some cases, inflation was already low and stable prior to the adoption of the explicit objective. it is thus legitimate to investigate whether the establishment of an explicit inflation objective has had other measurable effects, particularly with regard to the anchoring of long - run inflation expectations. 26 chart 2 presents realized inflation along with a survey - based measure of mean inflation expectations at the two - year - ahead and six - to - ten - year - ahead horizons. the evidence supports the view that medium - to long - term expectations have become well anchored around the official objectives. first, survey - based measures of long - term inflation expectations have converged toward the official inflation objective in all countries. this fact is consistent with central banks making credible, long - term commitments to pursuing their objectives, even in countries where the objective must be renewed on a regular basis. moreover, surveys of professional forecasters in each of these economies reveal that

be followed consistently over time because the short - run gains of deviating from the plan are too tempting, then that plan is said to be time - inconsistent. in such a setting, the time - consistent policy is to reoptimize mishkin ( 2007c ) provides extensive discussion of the modern science of monetary policy and its implications for the design and communication of the policy framework. i would like to thank spencer dale, christopher erceg, etienne gagnon, linda kole, andrew levin, and ricardo nunes for assistance and helpful comments in preparing this speech. this change in views occurred as a result of the so - called rational expectations revolution, which was launched by a series of remarkable papers by nobel prize - winner robert lucas ( 1972, 1973, 1976 ). the time - inconsistency problem was first outlined in papers by kydland and prescott ( 1977 ) and calvo ( 1978 ). every period, whereas the preferable alternative would be to establish a firm commitment to the optimal long - run plan. to take a common example that illustrates the time - inconsistency problem, someone may make a new year ’ s resolution about starting a diet. at some point thereafter, however, it becomes hard to resist having a little bit of rocky road ice cream, and then a bit more, and pretty soon the weight begins to pile back on. the time - inconsistency problem arises in the context of monetary policy, because there is a temptation to give a short - run boost to economic output and employment by pursuing a course of policy that is more expansionary than firms or workers had initially expected. 5 nevertheless, if the economy is already at full employment, then this boost is merely transitory : as economic activity rises above its sustainable level, wages and prices begin to rise, and the private sector's inflation expectations start to pick up. of course, the central bank must eventually remove the policy stimulus to avoid a continuous upward spiral of inflation. at that point, economic activity drops back to a sustainable level. however, inflation settles in at a permanently higher rate because prospects of future monetary expansions become embedded in expectations, and hence in wage and price adjustments, and the higher average inflation rate generates undesirable economic distortions. 6 thus, failing to address the time - inconsistency problem poses the risk of ending up with a higher average inflation rate, with detrimental long - run consequences for economic efficiency and the general standard of