a number of attractive features. they assume that central banks can appropriately pay attention simultaneously to developments in both output and inflation, provided their reactions occur in the context of a longer - run goal of price stability and that they recognize that activity is limited by the economy ’ s sustainable potential. as taylor himself has pointed out, these types of formulations are at best “ guideposts ” to help central banks, not inflexible rules that eliminate discretion. one reason is that their formulation depends on the values of certain key variables - - most crucially the equilibrium real federal funds rate and the production potential of the economy. in practice these have been obtained by observation of past macroeconomic behavior - - either through informal inspection of the data, or more formally as embedded in models. in that sense, like all rules, as i noted earlier, they embody a forecast that the future will be like the past. unfortunately, however, history is not an infallible guide to the future, and the levels of these two variables are currently under active debate. the mechanics of monetary policy that i have been addressing are merely means to an end. what are we endeavoring to achieve, and why? the goal of macroeconomic policy should be maximum sustainable growth over the long term, and evidence has continued to accumulate around the world that price stability is a necessary condition for the achievement of that goal. beyond this very general statement, however, lie difficult issues of concept and measurement for policymakers and academicians to keep us occupied for the next fifteen years and more. inflation impairs economic efficiency in part because people have difficulty separating movements in relative prices from movements in the general price level. but what prices matter? certainly prices of goods and services now being produced - - our basic measure of inflation - - matter. but what about prices of claims on future goods and services, like equities, real estate or other earning assets? is stability in the average level of these prices essential to the stability of the economy? recent japanese economic history only underlines the difficulty and importance of this question. the prices of final goods and services were stable in japan in the mid - to - late 1980s, but soaring asset prices distorted resource allocation and ultimately undermined the performance of the macroeconomy. in the united states, evaluating the effects on the economy of shifts in balance sheets and variations in asset prices has been an integral part of the development of monetary policy. in recent years, for example, we have ex

be some general sense of the purchasing power of money both across time and across goods and services. hence, we must assume that embodied in all products is some unit of output, and hence of price, that is recognizable to producers and consumers and upon which they will base their decisions. the emergence of inflation - indexed bonds does not solve the problem of pinning down an economically meaningful measure of the general price level. while there is, of course, an inflation expectation premium embodied in all nominal interest rates, it is fundamentally unobservable. returns on indexed bonds are tied to forecasts of specific published price indexes, which may or may not reflect the market ’ s judgment of the future purchasing power of money. to the extent they do not, of course, the implicit real interest rate is biased in the opposite direction. doubtless, we will develop new techniques of measurement to unearth those true prices as the years go on. it is crucial that we do, for inflation can destabilize an economy even if faulty price indexes fail to reveal it. it should be evident from my remarks that ample challenges will continue to face monetary policy. i have concentrated on how we have tried to identify and analyze new developments, and endeavored to use that analysis to fashion and balance policy responses. i have also tried to highlight the questions about how to specify and measure the ultimate goals of policy. nonetheless, all of us could easily add to the list. in dealing with these issues, policy can only benefit from focused and relevant academic research. i look forward to learning about and utilizing the contributions made under the sponsorship of the center for economic policy research over the years to come.