economic outcomes, such as real economic growth and inflation. one element of communication that has received a good deal of attention is forward guidance. forward guidance is central bankers ’ speak for communication about the future course of monetary policy, and particularly about the likely path of the short - term policy rate. one reason for this increased attention on the future path of policy is that short - term rates have been constrained by the zero lower bound. so when, or under what conditions, the nominal policy rate might eventually rise takes on greater significance. bis central bankers ’ speeches however, forward guidance is not a separate or independent tool of policy. its effectiveness is intimately related to other features of monetary policy. in particular, a credible, systematic approach to policy and the general openness and transparency of the policy process are essential elements in shaping expectations. even with this recognition, there are various views about how best to communicate information about the intended path of policy and how to ensure that such information is credible. if it is not credible, then it will not shape expectations in a beneficial way. more generally, a central bank can and often does communicate on a host of important issues, including its view of the current state of the economy, its assessment of risks, and its outlook for key economic variables. perhaps most important, from my perspective, is communication about how the evolution of key economic variables systematically shapes current and future policy decisions. in my remarks this morning, i want to stress the importance of the fomc articulating such a systematic approach to policy. doing so is likely to make forward guidance more effective, by helping the public to better interpret what that guidance means. the benefits of systematic monetary policy so what do i mean by a systematic approach to policy? quite simply, i mean conducting policy in a more rule - like manner. the antithesis of such rule - like behavior, of course, is discretion ; that is, policymaking conducted period by period with great latitude to take whatever actions seem best at the time. the rules - versus - discretion debate in economics is an old one, dating back at least to henry simons in 1936. 1 yet, following the nobel prize - winning work of finn kydland and ed prescott in 1977, most academic economists – but, unfortunately, far fewer policymakers – have come to accept the benefits of adhering to rule - like behavior in monetary policy. 2 these benefits arise, in part, because consumers and businesses are forward looking, and credible commitments concerning the deter

firms. the longer it takes to reach a resolution on a credible plan to reduce future deficits, the more damage is done to the economy in the near term. the cause of the current fiscal crisis is sometimes attributed to cyclical factors and the magnitude of the recent global recession. it is certainly true that the financial crisis and the policy choices made by governments to deal with the ensuing recession have caused a significant deterioration in fiscal balances and debt levels in many countries. for example, in the u. s., the federal budget deficit is now about 9 percent of gross domestic product, up from less than 2 percent in 2007. however, the underlying trends that are at the root of unsustainable fiscal deficits in many countries, including the u. s., have been in place and known for some time. even after cyclical effects play out, many countries will have large structural budget deficits. in this sense, the financial crisis and recession have simply exacerbated the underlying problems and perhaps moved up the day of reckoning. in some bis central bankers ’ speeches cases, such as greece, that day has come. market participants have begun to question the solvency of governments and their ability to honor their sovereign debt obligations. in europe, the doubts have greatly complicated the political problems as various countries debate the question of “ who pays ” for the anticipated bad debts of individual countries. here too, the protracted nature of the political debate creates uncertainty, which undermines economic growth and exacerbates the crisis. indeed, the argument offered by many that preventing greek default would prevent the crisis from spreading has proven false. the interaction of monetary policy and fiscal policy the fiscal challenges are daunting, yet they also have implications for monetary policy. the policy choices made during the recent global recession have made these implications even more complex and potentially dangerous. but the appropriate relationship between monetary and fiscal policy is not a new topic. indeed, our very first policy forum in 2001 was organized around three questions for monetary policymakers, one of which was how should monetary and fiscal policy interact? it is widely understood that governments can finance expenditures through taxation, debt, or printing money. if public debt levels are high and rising, and fiscal policymakers are reluctant to make the hard choices of cutting expenditures or increasing taxes, history suggests that governments often resort to the printing press to try to escape their budget problems. yet we all understand that this option is a recipe for creating substantial inflation. indeed,