ben s bernanke : inflation expectations and inflation forecasting remarks by mr ben s bernanke, chairman of the board of governors of the us federal reserve system, at the monetary economics workshop of the national bureau of economic research summer institute, cambridge, massachusetts, 10 july 2007. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * i would like to thank christina romer and david romer for giving me the chance to address participants in the summer institute, sponsored by the national bureau of economic research ( nber ). as an academic, i regularly attended the summer institute and presented or commented on research here. i also served for a time as the director of the monetary economics group, the position now shared by david and christina. the informal nature of the institute, the large number of talented people in attendance, and the opportunity to hear about the very latest work in the field – often while in early draft form – made these few weeks each summer one of the most stimulating times of the year for me. in my current position, i am keenly aware of the long history of fruitful interaction between economists inside and outside of central banks, and i am eager to see this interaction continue. this ongoing intellectual exchange, by improving our understanding of the economy and the workings of monetary policy, has had and will continue to have sizable benefits. today i will offer a few remarks on the relationships among monetary policy, inflation, and the public's expectations of inflation, focusing – as seems appropriate for this audience – on some important open questions. i will also give a short overview of the way the federal reserve board staff forecasts inflation, including some discussion of how the staff incorporates information about expected inflation into its forecasting process. as you know, the control of inflation is central to good monetary policy. price stability, which is one leg of the federal reserve's dual mandate from the congress, is a good thing in itself, for reasons that economists understand much better today than they did a few decades ago. inflation injects noise into the price system, makes long - term financial planning more complex, and interacts in perverse ways with imperfectly indexed tax and accounting rules. in the short - to - medium term, the maintenance of price stability helps avoid the pattern of stop - go monetary policies that were the source of much instability in output and employment in the past. more fundamentally, experience suggests

. i ’ d like to conclude by touching briefly on the issue of central bank credibility because i believe it ’ s been an enabling factor in our taking a cautious approach. over the last twenty years, the fed has built a reasonably good reputation for containing inflation. this credibility has allowed us some flexibility to delay raising interest rates - despite many forecasts that inflation would soon rise. without this leeway, we might have faced a jump in inflation expectations with adverse reactions in financial markets. going forward, we intend to maintain our credibility by continuing to keep inflation under control.