expectations in the united states are anchored. specifically, to what extent would inflation expectations rise if actual inflation increased for some reason? to address this question, andrew levin, fabio natalucci, and jeremy piger ( 2003 ) examined u. s. private - sector forecasts of inflation since 1994. they found that medium - and long - term forecasts of inflation in the united states are strongly correlated with three - year moving average of lagged inflation, a finding that suggests that inflation expectations are not entirely anchored but are instead subject to adaptive learning. as a supporting piece of evidence, levin, natalucci, and piger show that, compared to other industrial countries, shocks to inflation tend to be relatively persistent in the united states, an implication of models with adaptive learning. 8 bond markets provide fertile ground in which to search for evidence on the importance of adaptive learning and the degree to which expectations are well anchored. for example, refet gurkaynak, brian sack, and eric swanson ( 2003 ) show that distant forward rates ( e. g., the implied one - year forward rate ten years in the future ) move significantly in response to the unexpected components of both monetary policy decisions and a number of macroeconomic data releases. because they do not find the same result for inflation - indexed securities ( that is, real forward rates do not respond to policy or data surprises ), they conclude that long - term expectations of inflation must not be tightly anchored in the united states. kevin kliesen and frank schmid ( 2003 ) support these findings by showing directly that ten - year inflation expectations, as derived from inflation - indexed bonds, respond significantly to policy surprises as well as to the unexpected components of macroeconomic data releases. 9 interesting work by sharon kozicki and peter tinsley ( 2001a, 2001b ) bears directly on the importance of asymmetric information and learning in financial markets. kozicki and tinsley incorporate alternative specifications of the evolution of inflation expectations in a standard model of the term structure ( see campbell, lo and mackinlay, 1997 ). kozicki and tinsley show that by far the best fit is obtained when inflation expectations are modeled as evolving by adaptive learning, in which inflation expectations adjust slowly to actual inflation. when inflation expectations are modeled this way, and only when they are modeled this way, the expectations theory of the term structure performs well and estimated term premiums are relatively small. in related research, glenn rudebusch and tao

of a safety net. in a domestic context, it is difficult to achieve financial balance without a regulatory structure that seeks to simulate the market incentives that would tend to control these financial elements if there were not broad safety nets. it is even more difficult to achieve such a balance internationally among sovereign governments operating out of different cultures. thus, governments have developed a patchwork of arrangements and conventions governing the functioning of the international financial system that i believe will need to be thoroughly reviewed and altered as necessary to fit the needs of the new global environment. a review of supervision and regulation of private financial institutions, especially those that are supported by a safety net, is particularly pressing because those institutions have played so prominent a role in the emergence of recent crises. as i have testified previously, i believe that, in this rapidly expanding international financial system, the primary protection from adverse financial disturbances is effective counterparty surveillance and, hence, government regulation and supervision should seek to produce an environment in which counterparties can most effectively oversee the credit risks of potential transactions. here a major improvement in transparency, including both accounting and public disclosure, is essential. to be sure, counterparties often exchange otherwise confidential information as a condition of a transaction. but broader dissemination of detailed disclosures of governments, financial institutions, and firms, is required if the risks inherent in our global financial structure are to be contained. a market system can approach an appropriate equilibrium only if the signals to which individual market participants respond are accurate and adequate to the needs of the adjustment process. among the important signals are product and asset prices, interest rates, debt by maturity, detailed accounts of central banks, and private enterprises. blinded by faulty signals, a competitive free - market system cannot reach a firm balance except by chance. in today ’ s rapidly changing market place producers need sophisticated signals to hone production schedules and investment programs to respond to consumer demand. there is sufficient bias in political systems of all varieties to substitute hope ( read, wishful thinking ) for possibly difficult pre - emptive policy moves, both with respect to financial systems and economic policy. there is often denial and delay in instituting proper adjustments. recent propensities to obscure the need for change have been evidenced by unreported declines in official reserves, issuance by governments of the equivalent to foreign currency obligations, or unreported large forward short positions against foreign currencies. it is very difficult for political leaders to incur what they perceive as large immediate political costs to contain problems that