despite these gyrations, core inflation remained firmly anchored throughout the period, registering between 1. 5 percent and 2. 0 percent on a twelve - month basis in every month. although structural changes have occurred in the economy since the 1970s, including increased energy efficiency, this difference in the degree of pass - through from oil prices to general inflation can be explained, in my view, only by differences in the stability of inflation and inflation expectations. overall, it is reasonable to conclude that macro policy, particularly monetary policy, was the most important single reason for the poor economic performance experienced during the u. s. great inflation. constrained discretion and inflation targeting i mentioned at the beginning of the talk that constrained discretion characterizes at least to some degree the policy approach of many of the major central banks around the world. it is, in fact, closely related to the policy framework known as inflation targeting. let me take a moment to explain the relationship between what i have termed “ constrained discretion ” and the more familiar concept of inflation targeting. it is useful, i think, to divide monetary policymaking into two parts - roughly, what you do and what you say about it. “ what you do ” covers the operational aspects of policy - the assessment of economic conditions and the setting of policy instruments ( such as the federal funds rate in the united states ). in related work, bohi ( 1989 ) and bernanke, gertler, and watson ( 1997 ) provide evidence that macroeconomic policy, rather than the behavior of oil prices, was the most important source of macroeconomic instability in the 1970s. in a study of oecd countries, ball and sheridan ( 2003 ) find that the effect of commodity price shocks on inflation in recent years has dropped by a factor of ten, relative to earlier decades. “ what you say ” is about how you talk to the public and relates to the issues of central bank transparency, communication, and accountability. “ what you do ” is certainly the more important of the two, though i think most central bankers understand that communication is a valuable tool. the details of inflation - targeting regimes vary by country and have evolved over time. broadly speaking, however, the operational, or “ what you do, ” side of what i consider to be best - practice inflation targeting is well described as constrained discretion, as i have characterized it here. specifically, most inflation - targeting central banks try to stabilize output and employment subject to the constraint that inflation remain low and stable - in

capital based on stress tests are both more forward looking and more robust to “ tail risk ” – that is, to extremely adverse developments of the sort most likely to foster broad - based financial instability. second, because the federal reserve conducts stress tests simultaneously on the major institutions it supervises, the results can be used both for comparative analyses across firms and to judge the collective susceptibility of major financial institutions to certain types of shocks. indeed, comparative reviews of large financial institutions have become an increasingly important part of the federal reserve ’ s supervisory toolkit more generally. third, the disclosure of stress - test results, which increased investor confidence during the crisis, can also strengthen market discipline in normal times. the stress tests thus provide critical information about key financial institutions while also forcing the firms to improve their ability to measure and manage their risk exposures. stress - testing techniques can also be used in more - focused assessments of the banking sector ’ s vulnerability to specific risks not captured in the main scenario, such as liquidity risk or interest rate risk. like comprehensive stress tests, such focused exercises are an important element of our supervision of sifis. for example, supervisors are collecting detailed data on liquidity that help them compare firms ’ susceptibilities to various types of the federal reserve ’ s stress - testing program is discussed in ben s. bernanke ( 2013 ), “ stress testing banks : what have we learned? ” speech delivered at “ maintaining financial stability : holding a tiger by the tail, ” a financial markets conference sponsored by the federal reserve bank of atlanta, held in stone mountain, ga., april 8 – 10. more limited forms of stress testing were used by supervisors before 2009. bis central bankers ’ speeches funding stresses and to evaluate firms ’ strategies for managing their liquidity. supervisors also are working with firms to assess how profitability and capital would fare under various stressful interest rate scenarios. federal reserve staff members supplement supervisory and stress - test information with other measures. for example, though supervisors have long appreciated the value of market - based indicators in evaluating the conditions of systemically important firms ( or, indeed, any publicly traded firm ), our monitoring program uses market information to a much greater degree than in the past. thus, in addition to standard indicators – such as stock prices and the prices of credit default swaps, which capture market views about individual firms – we use market - based measures of systemic stability derived from recent research. these measures use correlations