In this environment, a backward-looking policy that ignored the potential drag on future demand from Asia could risk magnifying the effect of the shift in aggregate demand. Rule No. 4: The appropriate policy response may depend on the source and persistence of the shock. Let me distinguish two types of shocks to the economy.
The first is a persistent demand shock -- for example, an increase in aggregate demand that results in a persistent departure from trend growth and persistent changes in utilization rates. This will have symmetric effects, raising both output and inflation, and presents a relatively straightforward monetary policy problem that is well handled by the first set of rules.