inflation of the 1960s and 1970s and the “ new economy ” period of the late 1990s. shifting stars and the great inflation while the crisis and its aftermath have been extraordinary in many ways, the shifting of the stars is not one of them. figure 2 illustrates the congressional budget office ’ s ( cbo ) current estimate of movements in the natural rate of unemployment and potential gdp growth from 1960 to 2000. 5 viewed against the ups and downs observed over these four decades, the recent shifts in longer - run values are not all that dramatic. of course, these cbo estimates benefit from many years of hindsight, whereas monetary policy must be based on assessments made in real time. the great inflation period vividly illustrates the difficulties this difference raises. around 1965, the united states entered a period of high and volatile inflation that ended with inflation in double digits in the early 1980s. multiple factors, including monetary policy errors, contributed to the great inflation. many researchers have concluded that a key mistake was that monetary policymakers placed too much emphasis i am using the cbo ’ s estimates to reflect a conventional view over that time span since the sep longerrun values have only been reported since 2009. - 7on imprecise - - and, as it turns out, overly optimistic - - real - time estimates of the natural rate of unemployment. 6 figure 3 compares the cbo ’ s current view of the natural rate of unemployment in that era with an estimate by athanasios orphanides and john williams of the rate as policymakers perceived it in real time. from 1965 to the early 1980s, this real - time estimate of u * was well below where hindsight now places it. the unemployment rate over this period was generally well above the real - time natural rate, and contemporary documents reveal that policymakers were wary of pushing the unemployment rate even further above u * ( figure 4, top panel ). 7 with the benefit of hindsight, we now think that, except for a few years in the mid - 1970s, the labor market was tight and contributing to inflation ’ s rise ( figure 4, lower panel ). it is now clear that the fomc had placed too much emphasis on its imprecise estimates of u * and too little emphasis on evidence of rising inflation expectations. the great inflation did, however, prompt an “ expectations revolution ” in macroeconomic thinking, with one overwhelmingly important lesson for monetary policymakers : anchoring longer - term inflation expectations is a vital precondition for

mr ferguson reviews the historical perspective and policy implications of global financial integration remarks by mr roger w ferguson jr, a member of the board of governors of the us federal reserve system, at the annual policy seminar of the national association for business economics, washington dc, on 4 / 3 / 99. global financial integration : historical perspective and policy implications thank you very much for inviting me to speak to this distinguished group of business economists and analysts. as we have discovered over the last eighteen months or so, we live in a rapidly changing global economic and financial environment. today, given the theme of your conference, i would like to put the events of the last few years into a broader historical context, and ask what are the most appropriate policy solutions. yesterday and today let me turn to a previous period of close global linkage in economic and financial markets : the forty years or so prior to world war i. here i will draw on a recent nber working paper by michael bordo, barry eichengreen and jongwoo kim. 1 during this time, capital flowed essentially without restriction, chiefly from developed western europe to regions in the then rapidly developing countries of the americas and to australia. just to put this in perspective, these three economists report that at its peak, the outflow from the united kingdom reached 9 percent of gnp and was almost as high in france, germany and the netherlands. much of this capital was invested in bonds that financed railroads and other infrastructure investments and in long - term government debt instruments, but there was also significant direct foreign investment. bordo, eichengreen and kim find that one element of the pre - 1914 episode of global financial integration is the size and persistence of the current account deficits of capital importing countries, mainly australia, canada, argentina and the scandinavian countries. similarly, the current account surpluses of some capital exporters, particularly the united kingdom, showed considerable persistence. these economic historians indicate that it was not unusual for these countries to experience current account imbalances, deficits for the capital importers or surpluses for the capital exporters, of between 5 percent and 10 percent of gdp lasting for several years. the size and persistence of these capital account imbalances in the pre - 1914 period appear to compare roughly with the size of current account imbalances that have existed in the most recent period of global financial integration. economic historians indicate that during the period from 1971 to 1997, emerging market countries were running, on average, current