Implementing Monetary Policy

Abstract

During the past three years, central banks have faced challenges

that few foresaw during the period known as the Great Moderation.

During the crisis, central banks have responded with traditional

interest rate tools, been forced to deal with the zero lower bound on

nominal interest rates, and expanded the scope of their lender of

last resort function. In addition, quantitative easing and credit easing

policies have entered the toolkit of central banks. After briefly discussing

the instruments of monetary policy and reviewing the performance

of inflation targeting, I consider three suggested modifications

to this policy framework. These are raising the average target

for inflation, incorporating additional objectives, and switching to

price level targeting.