output gap and the design of monetary policy, " journal of economics and business, vol. 52 ( january - april ), pp. 117 - 41. a discussion of risk management by central bankers is in alan greenspan ( 2004 ), " risk and uncertainty in monetary policy, " speech given at the meetings of the american economic association, january 3. individuals. 10 in any event, i know that the heterogeneous viewpoints expressed by my fellow committee members are intellectually stimulating and that they spur me to improve my own thinking about the economy and about the best course for monetary policy. thus policymakers and the public at large live in an uncertain world. for example, most of you are probably wondering when this speech will end. i thought about gradually drawing to a close at, say, a measured pace, but my risk - management instincts tell me just to stop. thank you. alan s. blinder and john morgan ( 2005 ), " are two heads better than one? monetary policy by committee, " journal of money, credit, and banking, vol. 37 ( october ), pp. 789 - 811.

of the spectrum are policymakers who suspect that most firms and households form their expectations using something closer to simple rules of thumb based on recent history. under this alternative worldview, a string of adverse supply shocks is dangerous because it has the potential to cause rising inflation to become embedded in expectations. should this shift in expectations occur, the joshua gallin ( 2004 ), " the long - run relationship between house price and rents, " finance and economics discussion series 2004 - 50 ( washington : board of governors of the federal reserve system, september ). jonathan mccarthy and richard peach ( 2004 ), " are home prices the next ‘ bubble ’? " federal reserve bank of new york, economic policy review, vol. 10 ( december ), pp. 1 - 17. donald l. kohn ( 2006 ), " monetary policy and asset prices, " speech given at the european central bank colloquium held in honor of otmar issing, march 16. central bank would face a persistent inflation problem, one whose correction would likely require a prolonged period of tight monetary policy. in this less comfortable world, restoring price stability can involve a painful process of slow growth and elevated unemployment. of course, these considerations are more than a theoretical curiosity and help to explain the intense focus of central banks on inflation expectations. the marked rise in energy prices over the past few years led until recently to a rate of overall consumer price inflation notably above core inflation. however, the available measures of expectations - whether from surveys or financial markets - have shown longer - term expectations increasing very little, if at all, throughout this period, providing some assurance about the inflation outlook. however, this is an ex post assessment. as a policymaker, i would have been more confident in my ex ante judgment about the risk of expectations moving higher if we had had a better understanding of the determinants of expectations regarding prices and of the links between these expectations and the subsequent performance of inflation. more generally, the uncertainty we face about the process of expectations formation makes interpretation of the underlying correlations in the data challenging. this is no surprise : the rational expectations revolution begun by robert lucas more than thirty years ago started from the premise that it is impossible to move from reduced - form evidence to the underlying economic structure without understanding the evolution of expectations. much of the macroeconomic literature over the past few years has focused on how alternative assumptions about expectations may explain the patterns of correlations in aggregate data. however, the empirical weaknesses of the