Implementing Monetary Policy

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.