The price of imported oil in the US doubled between summer 2003 and summer 2005, reducing consumers' purchasing power by more than 1 per cent of gross domestic product.

Thirty years ago, many economists argued that inflation was a kind of minor inconvenience and that the cost of reducing inflation was too high a price to pay. No one would make those arguments today.

Unless the trade deficit shrinks, the combination of the trade deficit and the interest and dividend payments to foreigners will grow ever more rapidly.

We pay some price when necessary to bring down inflation but that price is temporary and is not large relative to the permanent gain from reduced inflation.

Increased government spending can provide a temporary stimulus to demand and output but in the longer run higher levels of government spending crowd out private investment or require higher taxes that weaken growth by reducing incentives to save, invest, innovate, and work.

A second reason why science cannot replace judgement is the behavior of financial markets.

To finance this trade deficit, the U.S. has to borrow from the rest of the world or sell American assets like stocks, businesses, and real estate to the rest of the world.

A rise in the level of saving can reduce aggregate activity temporarily but only a sustained high level of saving makes it possible to have the sustained high level of business investment that contributes to the long-run growth of output.

So just as I want pilots on the planes that I fly, when it comes to monetary policy, I want to think that there is someone with sound judgement at the controls.

And finally, no matter how good the science gets, there are problems that inevitably depend on judgement, on art, on a feel for financial markets.

Domestic inflation reflects domestic monetary policy.

First, I think the science of monetary economics has clearly gotten better.

I think that over the last few decades, we have seen better economic outcomes than in the past.

Inflation is lower and more stable and the real business cycle fluctuations are more modest.

My theme this evening is that America needs a competitive dollar.

The more competitive value of the dollar turned around the trade deficit.

The only way that we can reduce our financial dependence on the inflow of funds from the rest of the world is to reduce our trade deficit.

We are particularly poor at the open economy issues.

After all, an overvalued dollar gives us the ability to buy foreign goods at lower prices. And the existing volume of exports brings more yen and euros than they would if the dollar were more competitive.

Although economists have studied the sensitivity of import and export volumes to changes in the exchange rate, there is still much uncertainty about just how much the dollar must change to bring about any given reduction in our trade deficit.