rise in periods when unemployment was low and vice - versa. starting in the 1980s, however, this correlation began to weaken noticeably. in fact, some researchers now find no relationship at all, whereas others tend to find one that is of reduced economic importance. 2 again, similar shifts have been observed in other countries, and these results are not sensitive to whether we are looking at core inflation or total inflation ( borio and filardo, 2006 ; ihrig and others, forthcoming ). next on the list of changes is the influence of energy prices. during the 1970s, fluctuations in energy prices appear to have had a significant influence on core inflation – that is, on the growth rate of consumer prices excluding food and energy. but since the early 1980s, the inflationary effect of the academic literature refers to this new generation of macroeconomic models as dynamic stochastic general equilibrium models. christiano, eichenbaum, and evans ( 2005 ) is one of the most prominent examples of this new approach. atkeson and ohanian ( 2001 ) argue that the unemployment rate no longer has any ability to forecast inflation, while roberts ( 2006 ) argues that the correlation has fallen but is still nonzero. movements in prices for gasoline, natural gas, and other energy goods seems to have declined considerably, even after allowance is made for a secular decline in the energy intensity of the u. s. economy ( hooker, 1996 ). indeed, some estimates even suggest that energy price shocks have no effect whatsoever on core inflation. from a cost - accounting perspective, estimates of a zero effect seem too improbable to be taken literally : recent swings in energy input costs have been sufficiently large that they should have had a noticeable effect on the prices of other goods and services, even allowing for their relatively small share in overall costs. i will return later to possible explanations for the sharp drop in the estimated effects of movements in energy prices. 3 finally, one of the most striking changes in the u. s. economy in recent decades has been the reduction in the economy ’ s volatility. the standard deviation of quarterly growth of real ( that is, inflation adjusted ) gross domestic product for the united states since the mid - 1980s has been about half that experienced during the 1960s and 1970s. the volatility of inflation has fallen to a similar degree ; moreover, the reduction in volatility for both output and inflation is widespread across countries. of course, a smaller volatility

of the board of governors of the federal reserve system or the federal open market committee. the expectational approach to thinking about inflation now almost forty years old, the expectational approach to inflation dynamics – developed simultaneously by friedman and recent nobel prize winner edmund phelps – is still the dominant framework for thinking about inflation. let me begin with a quick review of what friedman and phelps said forty years ago and then discuss very briefly how it relates to current thinking about the inflation process. in friedman ’ s framework as expressed in his 1967 presidential address to the american economics association, inflation is related to inflation expectations as well as the level of resource utilization. friedman explained that for a variety of real - world reasons, wages and prices might not always adjust immediately to changes in the money supply. if they did not so adjust, monetary policy could affect resource utilization. the reason that friedman ’ s work, and that of phelps, was so revolutionary was that it overturned the earlier belief that monetary policy could have a permanent influence on resource utilization in favor of a new view that monetary policy could affect real activity only temporarily. in the early 1970s, robert lucas expanded on the ideas of friedman and phelps and noted that shifts in the way a central bank conducts monetary policy imply changes in the way the public forms its expectations. over the past thirty years, economists have taken these observations to heart in trying to explain the behavior of overall inflation. one standard approach starts with the notion that many wages and prices adjust only gradually to changes in costs and demand. that assumption about the microeconomic behavior of price setters has recently been bolstered by some research that has looked at the data underlying the consumer price index to assess how often prices change ( bils and klenow, 2004 ). the research finds that, indeed, prices for many goods and services appear to adjust only gradually, with the typical firm changing the price of a typical item about once every four months. when wages and prices adjust only infrequently, expectations are important, because firms and households must take into account the demand and supply conditions that will prevail until they again reset their prices. all sorts of expectations will matter, but central among them are inflation expectations : if wages and prices in general are rising over time, then when firms have a chance to reset their prices, they will generally set them higher than they would if the overall price level was holding steady. because the new approaches to understanding inflation are grounded in the behavior of individual decisionmakers, they have