finance the acquisition of high - quality assets they cannot produce in their own economies. refer to caballero, farhi, and gourinchas ( 2006 ) and mendoza, quadrini, and rios - rull ( 2007 ). during 2002 - 06, gross foreign official inflows totaled $ 1, 491 billion ; net official inflows were only slightly less, as u. s. official outflows were negligible. private foreign inflows net of private u. s. outflows totaled $ 1, 659 billion during the same period ; gross foreign private inflows were $ 4, 697 billion. another way to make this point is that current account balances and surpluses give countries the flexibility to spend more or less than their current output, as dictated by economic conditions and needs. and thus also benefited from running trade surpluses ; more recently, as domestic demand in europe has recovered, the trade surplus has declined. third, although the u. s. current account deficit is certainly not sustainable at its current level, u. s. liabilities to foreigners are not, at this point, putting an exceptionally large burden on the american economy. the net international investment position ( niip ) of the united states, although at a substantial negative 19 percent of gdp, is still smaller than the negative niip of several other industrial economies. as a fraction of net household wealth, which totaled almost $ 56 trillion in 2006, the negative niip is even smaller – less than 5 percent. moreover, the u. s. investment income balance, which essentially represents the debt service on the niip, remains positive, at least for now. thus, even after years of current account deficits and corresponding increases in net liabilities, the united states continues to earn more on its foreign investments than it pays on its foreign liabilities. and, as best we can tell, the share of u. s. assets in foreign portfolios does not seem excessive relative to the importance of the united states in the global economy. all that said, the current pattern of external imbalances – the export of capital from the developing countries to the industrial economies, particularly the united states – may prove counterproductive over the longer term. i noted some reasons for concern in my earlier speech, and they remain relevant today. first, the united states and other industrial economies face the prospect of aging populations and of workforces that are growing more slowly. these trends enhance

– the debate on what is known as monetarism – has simply been put aside after the interest rate approach has gained ground. central banks naturally seek to closely monitor economic developments and to respond through their respective interest rate policies to perceived shocks to price stability. this is no easy task, as distinguishing temporary factors affecting inflation from permanent changes is difficult. central banks aiming at price stability over the medium term do not want to react to all temporary fluctuations in inflation. on the other hand, monetary policy under changing circumstances must give proof of sufficient sensitivity in order to keep inflation expectations firmly anchored to price stability. the main reason for the non - reliance on mechanistic rules in making interest rate decisions is the difficulty of interpreting the economic situation. monetary policy theory and also practical decisionmaking necessarily operate on the basis of highly abstract concepts. these include potential output, the rate of change in total factor productivity, the neutral real interest rate level and prevailing inflation expectations. these variables are theoretical concepts that cannot be measured unambiguously. they also vary over time. making a proper assessment of the economic situation is however the fatal question of monetary policy. us studies have even pointed out that losing control of inflation in the 1970s was a consequence of a misjudgement of the us economy's output potential after the 1973 oil crisis. therefore, as interest rate decisions are inevitably accompanied by a high degree of discretion and decisions must be made in an environment of uncertainty, it would be unrealistic to assume that price stability could be maintained over short horizons, from month to month and from quarter to quarter. taking uncertainty into account underscores the fact that the objective of price stability must be set over the medium term. even more important is that monetary policy credibility rests on a sound footing and that inflation expectations are firmly anchored, making it unnecessary for monetary policy to respond to every fluctuation in inflation. in the last few years, one of the focal areas for both practitioners and researchers of monetary policy has been the question of policy transparency, in other words the effectiveness of communication. monetary policy transparency means how well the public is aware of the central bank's monetary policy intentions and the issues on which the next interest rate decisions will depend. transparency concerning monetary policy objectives is naturally an important issue, as i already noted earlier. current discussion focuses specifically on shorter - term transparency, in other words, how a central bank should communicate its intentions for the near - term interest rate policy. communicating the stance of interest rate policy