period from 1996 to 1998, inflation also came in consistently lower than the staff forecast. here, the pick up in structural productivity growth was the likely cause : the historical record suggests that a sustained acceleration in productivity affects prices before it affects wages. thus, the pickup in productivity growth has a direct, depressing effect on costs - and thus ultimately on prices. it took fed forecasters - and others - a while to discern the acceleration in productivity and its implications for inflation. interestingly, by the time of the forecasts made in 1998 and 1999 - the 1999 and 2000 observations on the chart - the string of forecasting errors had ended. this improved performance likely reflected the eventual recognition that productivity growth had increased on a sustained basis. the discussion of the forecasting record that follows is largely a matter of conjecture and guesswork. it is hard to pinpoint the cause of any particular forecast error. i am drawing on my own memories of events, as well as those of current members of the board's staff. an agenda for further research as i noted at the beginning of my remarks, research aimed at improving our understanding of and ability to predict inflation is essential to the central banker's mission. the better the forecasts, the better the odds that policy choices will contribute to economic stability and efficient resource allocation. needless to say, more work remains to be done - and always will. my chart stops at 2000, but it is no secret that forecasters everywhere did not anticipate the extent of disinflation in the u. s. economy in 2003 and, even after the fact, have had trouble explaining what happened. moreover, the degree to which core inflation picked up in 2004 and 2005 also caught many economists, including this one on the fomc, by surprise. surprises are inevitable ; aggregate supply and demand curves shift for reasons that cannot be anticipated. but improvement should be possible in several dimensions. we could identify shocks sooner and get a better understanding of their likely effects on inflation. and we could attempt to narrow the definition of " shock. " i suspect that much of what we consider to be exogenous is the working out of endogenous events that we do not understand very well. better predictions inevitably begin with improved understanding - both theoretical and empirical. in reviewing some of the advances of the past thirty - five years for this talk, i was struck by the degree to which so much of the work on rigidities and expectations seemed to be trying to

. founding ideologies aside, countries'economies are more connected by virtue of increased trade of products and services. free markets, technological innovation, and instant communications are the watchwords of the global economy. and the dissemination of financial innovation has gained new converts. london, hong kong, singapore, and shanghai increasingly seek to challenge new york as the center of global financial markets. competitive national ambitions, perhaps, have demanded an embrace of economic liberalism to build wealth even among those regimes that may prefer something closer to autocracy in their non - economic dealings. democratizing credit to enlarge the global middle class, efficiently allocating capital, and dispersing risk exposures – these remain compelling practices for private market participants throughout the world. these financial market tailwinds bolstered worldwide economic growth, which is near record levels. in 2006, the u. s. economy grew 3 percent, while growth outside the united states averaged nearly 4 percent as all major regions racked up solid gains. so far this year ( through the third quarter in the united states and through the second quarter elsewhere ), u. s. output growth managed to continue apace, while growth for the rest of the world picked up to more than 4 percent. clearly the global economy has been firing on all cylinders, with emerging asia taking the lead. there can be little doubt that this macroeconomic performance is due, at least in part, to the increased adoption of liberal economic practices around the globe. perhaps, then, the case for the end of economic history is not without some evidentiary backing and persuasive appeal. evolution of monetary policy and financial stability in a recent survey paper, david laidler identifies three tenets that embody the current consensus on the conduct of monetary policy in advanced economies ( laidler, 2007 ). first, market economies are inherently self - righting ; second, open economies perform best under flexible exchange rates ; and third, central bankers should focus on price stability as their long - run objective. 4 monetary policy in the past couple of decades can, almost assuredly, claim far more successes than failures. look no further than measures of consumer price inflation in the the federal reserve's dual mandate is not inconsistent with laidler's third tenet. advanced economies. median inflation ( as defined by the international monetary fund ) has held near 2 percent for the decade. this performance has helped anchor inflation expectations, which, in turn, has helped damp the pass - through of