policy. of course, it is not difficult to put up with this additional burden when the structural change takes the form of a decline in the nairu and an increase in trend productivity growth. it would not be easy for monetary policy to turn such good fortune into poor macroeconomic performance. but the uncertainties about the nature and degree of structural change confront policymakers with the task of striving to realize the benefits of a decline in the nairu and an increase in trend growth while trying to avoid the inflationary consequences of overtaxing the new limits. recent work on signal extraction models and on the implications of noisy observations provides some important guidance about how to adjust the strategy of monetary policy in the face of the new uncertainties. this conference provides a timely opportunity to assess what we have learned and how it might be applied to monetary policy today, as well as to point to areas that may deserve further exploration. references brainard, w : “ uncertainty and the effectiveness of policy ”, american economic review, vol. 57 ( 1967 ), pp. 411 - 25. estrella, a, and f mishkin : “ rethinking the role of nairu in monetary policy : implications of model formulation and uncertainty ”, in j b taylor, ed., monetary policy rules. chicago : nber and university of chicago press, 1999. orphanides, a : monetary policy evaluation with noisy information, finance and economics discussion series no. 1998 : 50. washington, d. c. : board of governors of the federal reserve system, november 1998. rudebusch, g : “ is the fed too timid? monetary policy in an uncertain world ”, mimeo, federal reserve bank of san francisco, april 1999. sargent, t : “ discussion of ‘ policy rules for open economics ’ by lawrence ball ”, in j b taylor, ed., monetary policy rules. chicago : nber and university of chicago press, 1999. smets, f : output gap uncertainty : does it matter for the taylor rule? bis working paper no. 60, november 1998. svensson, l, and m woodford : “ indicator variables for monetary policy ”, mimeo, princeton university, february 2000. swanson, e : “ on signal extraction and non - certainty equivalence in optimal monetary policy rules ”, mimeo, board of governors of the federal system, march 2000.

growth of money dramatically. interest rates rose sharply with the banks ’ prime interest rate exceeding 20 %. the u. s. economy fell into a deep recession. inflation began to recede steadily. remarkably, despite the vigorous recovery that followed after 1983, inflation remained relatively subdued at 4 %. it reached a temporary floor of 2. 5 % by mid - 1992. as we revisit this dramatic moment in monetary history, we need to remember that it occurred against the backdrop of nearly 15 years of disillusion regarding the ability of activist “ keynesian ” economic policies to guarantee low inflation and full employment. from 1965 onwards, inflation had been on the rise and unemployment surged in the 70 ’ s, following the first oil shock. in the beginning of the 80 ’ s, it appeared that fiat money was inherently prone to cause periodic bouts of inflation and that there was little one could do about it. ( see annex for graph 1 ) since 1979, the global monetary environment has evolved dramatically. achieving and maintaining price stability has become the undisputed guiding principle of a vast majority of the world ’ s central banks. price stability ensures the signalling power of prices, thus bolstering the efficiency of the market mechanism. by preserving purchasing power, it facilitates long - term planning and induces long - term investments. price stability also prevents social injustices from emerging between debtors, workers and retirees. finally, price stability minimizes tax related distortions linked to the interaction of inflation and the tax code. 1 see martin feldstein ( 1983 ) : “ inflation, tax rules, and capital formation ”, chicago : university of chicago press. the determined focus of monetary policy on price stability has contributed to anchoring the public ’ s inflation expectations at low levels. the increasing scepticism of the 1960s and the 1970s about monetary policy ’ s ability to fight inflation has given way to confidence that prudent, consistent and forward - looking monetary policy can contain the destructive forces of inflation. global inflation figures suggest that such confidence is largely justified. in the industrialized world, inflation declined from 12 % in 1980 to 1. 4 % in 2002. 2 in the developing world, the decline of inflation has been even more remarkable with yearly rates tumbling from an average of 31 percent in the early 1980s to currently under 6 %. 3 along with a significant decline in inflation, volatility of economic growth has fallen everywhere. both in the u. s. as well as in germany, the