can now sustain a lower unemployment rate without rising inflation ( i. e., that nairu has declined ) and that, once capacity has been reached, the economy is now capable of faster growth, compared to the estimates of trend growth reported earlier. a lot of the discussion about this episode focuses on sorting out the relative importance of the two possibilities - specifically, whether the recent favorable performance is due more to labor market structural change, as reflected in a lower nairu, or to product market structural change, as reflected in a higher rate of growth in productivity. has there been a decline in nairu? time varying parameter estimates of the phillips curve and the more casual eye both suggest a decline in nairu. robert gordon ’ s work, for example, suggests a decline in nairu, from 6 % in the decade prior to 1994, to about 5½ % by the end of 1995, with nairu stabilizing at this level since that time. one possible explanation for the more moderate rate of increase in compensation per hour than would have been expected from historical experience is an increase in worker insecurity as a consequence of the rapid pace of technological change and / or the rapid pace of restructuring and downsizing. as a result, workers may have been willing to trade off some real wages for increased security, resulting in a more modest increase in compensation per hour than otherwise would have been expected. the result is a slower rate of increase in compensation at any given level of unemployment, equivalent to a decline in nairu. another possible explanation is the divergence between the unemployment and capacity utilization rates in this expansion that i discussed earlier. although a decline in nairu is a story of relaxed limits, the worker insecurity explanation is not itself an optimistic story. some workers, to be sure, gain, by opportunities for employment that otherwise would have been denied. but a broader group of workers suffer a slower increase in living standards, relative to what otherwise would have been “ possible. ” has there been an increase in trend productivity? another possibility is that the trend rate of increase in productivity - - and hence the economy ’ s sustainable rate of growth in gdp - - has recently increased. there is some confusion in many discussions of productivity growth about the implications of measurement bias. it is widely accepted that there is a downward bias in measured - 6productivity growth, the mirror image of the upward bias in measured inflation. but it is also widely accepted that a similar bias has been present over

mr. meyer considers the economic outlook and challenges facing monetary policy remarks by mr. laurence h. meyer, a member of the board of governors of the us federal reserve system, before the 1998 global economic and investment outlook conference, carnegie mellon university, pittsburgh, pennsylvania on 17 / 9 / 97. recent economic performance has been hailed on wall street as “ paradise found ” and the “ best of times. ” and, on main street, there is ample survey evidence suggesting that consumers are feeling very upbeat about the prospects for the economy. i call the remarkable combination of healthy growth, low unemployment, low inflation, a soaring stock market, and declining federal budget deficit the “ good news ” economy. but there are challenges even in the “ good news ” economy and i want to focus on three of them this afternoon. the first challenge is to avoid complacency and appreciate the policy challenges that remain. the second is to explain how we have been able to achieve such favorable performance, given that it is better than almost anyone predicted and better than historical regularities suggested was even possible. and the third challenge is to assess the risks in the current environment and determine how monetary policy should be positioned to keep the good news coming. two themes will become evident as i address these challenges. first, there are limits - limits on what policy can accomplish and limits on what the economy can achieve. second, in assessing the current environment and its implications for monetary policy, uncertainties require us to balance historical regularities and newer possibilities. expansions, to an important degree, have common properties, what i shall refer to as regularities. both forecasters and policymakers rely on these. forecasters make predictions about future developments based on regularities. the same regularities allow policymakers to act pre - emptively - changing policy today in anticipation of developments tomorrow. yet each expansion has its own signature that reflects the specific set of transitory influences and longer - lasting structural changes in play at the time. the current episode features the following players. cyclical regularities clearly in evidence include accelerator effects, changing tolerances for risk, and cyclical swings in the unemployment rate and in profits. two other regularities that i especially want to focus on today are the phillips curve and the trend growth in output. the latter regularities define limits - limits to the sustainable level of output, at any moment, and, once that level of capacity is reached, to the growth of output over time. if these limits are exceeded