other frictions besides sticky prices can lead to instances in which completely stabilizing sticky - price inflation would not imply stabilizing employment ( or output ) around their natural rates. for example, in response to an increase in productivity ( a positive technology shock ), the real wage has to rise to reflect the higher marginal product of labor inputs, which requires either prices to fall or nominal wages to rise for employment to reach its natural rate. if both nominal wages and prices are sticky, a policy of completely stabilizing prices will force the necessary real wage adjustment to occur entirely through nominal wage adjustment, thereby impeding the adjustment of employment to its efficient level ( blanchard, 1997 ; erceg, henderson, and levin, 2000 ). indeed, if wages are much stickier than prices, the best strategy is to stabilize nominal wage inflation rather than price inflation, thereby allowing price inflation to decline to achieve the required increase in real wages. fluctuations in inflation and economic activity induced by variation over time in sources of economic inefficiency, such as changes in the markups in goods and labor markets or inefficiencies in labor market search, could also drive a wedge between the goals of stabilizing inflation and economic activity ( blanchard and gali, 2006 ; gali, gertler, and lopez - salido, 2007 ). for example, in sectors of the economy subject to little competitive pressure, prices that firms set tend to be higher and output lower than would prevail under greater competition. monetary policy is, of course, unable to offset permanently high markups because of the principle, mentioned earlier, that the long - run phillips curve is vertical. however, a temporary increase in monopoly power that raises markups would exert upward pressure on prices without, at the same time, reducing the productive potential of the economy. that would, indeed, be a case of a tradeoff between stabilizing inflation and stabilizing output. these examples narrow the degree to which the recent findings of congruence between stabilizing inflation and economic activity apply in all cases, but they do not necessarily overturn the findings. the example of sticky wages would not invalidate the view that target, taken to be the baseline inflation rate ; and coefficient on each gap variable is 1. is the output gap. under that specification, the response the scenarios were constructed with a rule that assumes no knowledge of how long the oil price shock will last. research done by the staff of

##ntial standards for large banking organizations and nonbank financial firms designated by the fsoc. these standards will include enhanced risk - based capital and leverage requirements, liquidity requirements, and single - counterparty credit limits. the standards will also require the fsoc ’ s internal structure consists of a deputies committee – composed of personnel from all of the voting and nonvoting members – and six other standing committees, each with its own specific duties. the deputies committee, under the direction of the fsoc members, coordinates the work of the six committees and aims to ensure that the fsoc fulfills its mission in an effective and timely manner. bis central bankers ’ speeches systemically important financial firms to adopt so - called living wills that will spell out how they can be resolved in an orderly manner during times of financial distress. the act also directs the federal reserve to conduct annual stress tests of large banking firms and designated nonbank financial firms and to publish a summary of the results. to meet the january 2012 implementation deadline for these enhanced standards, we anticipate putting out a package of proposed rules for comment this summer. our goal is to produce a well - integrated set of rules that meaningfully reduces the probability of failure of our largest, most complex financial firms, and that minimizes the losses to the financial system and the economy if such a firm should fail. the federal reserve is working with other u. s. regulatory agencies to implement dodd - frank reforms in additional areas, including the development of risk retention requirements for securitization sponsors, margin requirements for noncleared over - thecounter derivatives, incentive compensation rules, and risk - management standards for central counterparties and other financial market utilities. the federal reserve has made significant organizational changes to better carry out its responsibilities. even before the enactment of the dodd - frank act, we were strengthening our supervision of the largest, most complex financial firms. we created a centralized multidisciplinary body called the large institution supervision coordinating committee to oversee the supervision of these firms. this committee uses horizontal, or cross - firm, evaluations to monitor interconnectedness and common practices among firms that could lead to greater systemic risk. it also uses additional and improved quantitative methods for evaluating the performance of firms and the risks they might pose. and it more efficiently employs the broad range of skills of the federal reserve staff to supplement supervision. we have established a similar body to help us effectively carry out our responsibilities regarding the oversight of systemically