, then shocks to inflation have long - lived effects on inflation. in other words, inflation behaves like a random walk, so that when inflation goes up, it stays up. if the sum of the coefficients drops well below 1. 0, then a shock to inflation has only a temporary effect on inflation, and inflation soon reverts back to its trend level. the evidence from these so - called autoregressions with u. s. data suggests that inflation may have grown less persistent over time. in particular, when autoregressions are run using rolling samples with a fixed width of, say, twelve years, the sum of the lagged coefficients often falls noticeably below unity as the sample advances to include the most recent data. figure 1 illustrates this tendency, with the core personal consumption expenditures ( pce ) price index as the measure of inflation. as you can see, the coefficient sum has declined to about 0. 6 or so since the late 1990s, although the dotted lines indicate that the confidence interval for this estimate is wide and still includes 1. 0. this result appears robust to the addition of other explanatory variables to the regression, although making such a modification does tend to reduce the extent of the estimated decline. finally, it ’ s worth noting that this i want to thank michael kiley, jean - philippe laforte, deborah lindner, david reifschneider, john roberts, and jeremy rudd for their extremely helpful comments and assistance on this speech. two recent studies that report a marked decline in inflation persistence in the united states are nason ( 2006 ) and williams ( 2006 ). their findings should be treated carefully, however, as analysis by the staff of the federal reserve board suggests that modest changes in methodology, such as lengthening the sample period, correcting for small - sample bias, or changing is not just a u. s. phenomenon, as some studies have found similar results for a number of other countries. 3 ( i might proudly note in passing that the staff of the federal reserve system is responsible for much of this research. to avoid boring you, i will refrain from providing references to this research, but the version on this speech on the board ’ s web site will include this information and will provide a more nuanced discussion of these results. ) recent work by jim stock and mark watson ( 2007 ) provides an alternative and, to me, a quite intuitive way of thinking about inflation persistence. they estimate

the collateralized mortgage obligation ( cmo ) market and the markets for structured notes and certain types of interest rate derivatives did not have adequate information about the potential volatility and prepayment risk involved. consequently, market participants did not appropriately model these risks and suffered significant losses when market interest rates rose sharply in the mid - 1990s. as in the case of the residential mortgage - backed securities market today, the general market reaction was a flight away from these instruments. however, over time, the market was restored as market participants came to better understand the risks and as standardized methods were developed to measure the risks and model the value of these instruments under alternative scenarios. increased information and standardized pricing conventions, such as the use of option - adjusted spreads, moved these instruments from the experimentation and learning phase to the phase of broad market acceptance. when market participants realize that they do not have the information necessary for proper valuation of risks, the price - discovery process can be disrupted, and market liquidity can become impaired. a significant investment in information gathering, processing, and evaluation may be necessary to revive the price discovery process. this revival is likely to take time and the market may not look the same when it re - emerges. let me describe in a bit more detail the ways in which these investments will take place and hence why recovery of price discovery may be a gradual process. first, market participants will likely need to collect more - detailed data in a more systematic manner in order to better understand the nature and risks of the instruments and their underlying assets. second, investments in enhanced systems to warehouse and model data related to these instruments will facilitate a better understanding of their risks, particularly under stress conditions. third, investors need to ensure that they have the so - called human capital expertise – that is, the people – to understand, interpret, and act appropriately on the results of the modeling and analysis of the information gathered. the pay - off from these investments will be a greater understanding of risks and greater ability to value the instruments. the development of greater standardization in a market another consequence of information investments is a tendency towards greater standardization of many of the aspects of an instrument, which can help to increase transparency and reduce complexity. as was demonstrated in the cmo market, as the market gains information about a product and develops a level of confidence in that information, the product tends to become increasingly standardized. standardization in the terms and in the contractual rights and obligations of purchasers and sellers of the product reduces the need for market