##ages appear to be in a continual state of flux. rules by their nature are simple, and when significant and shifting uncertainties exist in the economic environment, they cannot substitute for risk - management paradigms, which are far better suited to policymaking. were we to introduce an interest rate rule, how would we judge the meaning of a rule that posits a rate far above or below the current rate? should policymakers adjust the current rate to that suggested by the rule? should we conclude that this deviation is normal variance and disregard the signal? or should we assume that the parameters of the rule are misspecified and adjust them to fit the current rate? given errors in our underlying data, coupled with normal variance, we might not know the correct course of action for a considerable time. partly for these reasons, the prescriptions of formal interest rate rules are best viewed only as helpful adjuncts to policy, as indeed many proponents of policy rules have suggested. * * * in summary then, monetary policy based on risk management appears to be the most useful regime by which to conduct policy. the increasingly intricate economic and financial linkages in our global economy, in my judgment, compel such a conclusion. over the next couple of days, we will have the opportunity to consider in greater detail some important changes in our economic and financial systems and their implications for the conduct of monetary policy. as always, i look forward to an engaging discussion.

- changing economy and the sometimes asymmetric costs or benefits of particular outcomes, a central bank seeking to maximize its probability of achieving its goals is driven, i believe, to a risk - management approach to policy. by this i mean that policymakers need to consider not only the most likely future path for the economy but also the distribution of possible outcomes about that path. they then need to reach a judgment about the probabilities, costs, and benefits of the various possible outcomes under alternative choices for policy. a policy action that is calculated to be optimal based on a simulation of one particular model may not, in fact, be optimal once the full extent of uncertainty in the policymaking environment is taken into account. in general, it is entirely possible that different policies will exhibit different degrees of robustness with respect to the true underlying structure of the economy. for example, policy a might be judged as best advancing the policymakers ’ objectives, conditional on a particular model of the economy, but might also be seen as having relatively severe adverse consequences if the true structure of the economy turns out to be other than the one assumed. on the other hand, policy b might be somewhat less effective in advancing the policy objectives under the assumed baseline model but might be relatively benign in the event that the structure of the economy turns out to differ from the baseline. these considerations have inclined federal reserve policymakers toward policies that limit the risk of deflation even though the baseline forecasts from most conventional models would not project such an event. * * * at times, policy practitioners operating under a risk - management paradigm may be led to undertake actions intended to provide some insurance against the emergence of especially adverse outcomes. for example, following the russian debt default in the fall of 1998, the federal open market committee ( fomc ) eased policy despite our perception that the economy was expanding at a satisfactory pace and that, even without a policy initiative, was likely to continue to do so. we eased policy because we were concerned about the low - probability risk that the default might severely disrupt domestic and international financial markets, with outsized adverse feedback to the performance of the u. s. economy. the product of a low - probability event and a severe outcome, should it occur, was judged a larger threat than the possible adverse consequences of insurance that might prove unnecessary. the cost - or premium - - of the financial - contagion insurance was the associated increase in the risk of higher inflation at some future date. this cost was