to another large gain in the first quarter. investment should continue to be spurred by several factors : the accelerator effects of sales growth, favorable cash flow and financial conditions, ongoing opportunities to upgrade capital stocks with new technologies, and for this year, partial expensing. meanwhile, the decline in the dollar over the past two years and faster growth among our trading partners suggest that less of the strengthening of our domestic demand will be met by higher imports than it would be otherwise, and that rising exports will help to stimulate production in the united states. indeed, the global nature of the pickup in economic activity encourages me to think that we are seeing a fundamental turnaround in confidence and spending propensities that is likely to be self - reinforcing. all told, the u. s. economy has apparently made the transition from weakness to solid growth. however, even if these positive signs are borne out, the path of economic expansion will undoubtedly be uneven, and significant risks remain. one downside risk lies in spending by the household sector. purchases of new houses and durable goods have boomed over the past several years, raising the stocks of those capital goods in the hands of households. in addition, the saving rate is very low by historical standards. i expect that the growth in household investment will taper off, but a more pronounced pullback in spending cannot be ruled out, especially once interest rates rise. some observers have expressed concern that weakness in hiring, should it persist, would hold down the growth of labor income and weigh on consumer confidence, and thus could depress spending at some point. in recent quarters, however, slow hiring has been accompanied by strong productivity growth. over time, higher productivity will show up in higher wages. but even in the short - run, these new efficiencies have boosted capital income, and the resulting increases in dividend income and stock prices have, in the aggregate, provided at least a partial offset to restrained growth of wages and salaries. on the upside, business spending could turn out to be even more robust than i expect. businesses ’ caution about making commitments to meet future demand appears still to be eroding only slowly. should confidence return more quickly, we could see a more marked strengthening in capital spending, inventory accumulation, and hiring. the transition from extraordinary to merely rapid growth of potential aggregate supply the transition to more - rapid and self - sustaining increases in aggregate demand is critical to the outlook, but it is only part of the story. the full

specifically, the less reliable the indicator becomes, the smaller its weight will be in the optimal policy rule and the more weight will be placed on the other indicators about which uncertainty has not changed. in the current context, that means that the weight on the unemployment rate is decreased, while the weight on inflation is increased. in effect, as policy becomes less preemptive in stabilizing inflation, it becomes more aggressive in reacting to recent inflation. the second strand of the literature that supports the attenuation result is based on simulation results, as reflected in the work of orphanides, rudebusch, frank smets, and others. this work employs simple empirical models and a simple rather than an optimal rule and examines how policymakers should adjust the parameters of the simple rule in light of the uncertainty about the measurement of the output gap. it finds that policymakers should attenuate their response to changes in the output gap and, indeed, should move very cautiously when the confidence with which sure measures can be constructed is low. in contrast with the conclusions based on signal extraction models, the simulations results using simple rules generally finds that increased uncertainty about the output gap may call for attenuation in the response to both the gap variable and inflation. in some cases, certainty equivalence continues to hold, even with noisy observations. in swanson ’ s work, for example, optimal policy still displays certainty equivalence when policy is related to the unobservable excess demand. in the paper that svensson and woodford will present tomorrow, where the model relates inflation directly to the observed unemployment gap, certainty equivalence holds provided that the estimate of the gap is updated on the basis of all available data and the true model. this structure and result are also present in the work by orphanides. so the question is : how general or special is the attenuation result? this question appears particularly relevant to the uncertainties that monetary policymakers are wrestling with today, and i am sure we will have a lot of discussion about this conclusion tomorrow. i suspect the result is a general one for the following reasons. first, i believe part of the challenge today is finding a proxy for the unobservable excess demand, especially given the divergent movements in the unemployment and capacity utilization rates. therefore, in my view, swanson ’ s conclusion that certainty equivalence holds when policy is expressed in terms of the unobservable “ excess demand ” is dominated by his conclusion that attenuation holds when policy is made