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The worldwide progress in monetary policy is a great achievement and, especially considering the situation 30 years ago, a remarkable success story. I describe how the world achieved a working consensus on the core principles of monetary policy by the late 1990s. I survey the muddled state of affairs in the 1970s, and then ask: What happened in Federal Reserve policy to produce an understanding of the practical principles of monetary policy? How did formal institutional support for targeting low inflation abroad follow from an international acceptance of these ideas? And how did a consensus theoretical model develop in academia? I explain how the modern theoretical consensus—known alternatively as the New Neoclassical Synthesis or the New Keynesian model of monetary policy—reinforces key advances: the priority for price stability; the targeting of core rather than headline inflation; the importance of credibility for low inflation; and preemptive interest rate policy supported by transparent objectives and procedures. Of course, a working consensus does not constitute complete agreement. Accordingly, the conclusion identifies important monetary policy issues that remain to be explored.

The past two decades have seen enormous changes in central banks and their practices. In some countries, older institutions have been fundamentally restructured. In other, such as the countries of the former Soviet Union, entirely new central banks have been established. The member countries of the European Union have created a supranational central bank that oversees a monetary union. In all of these situations, central bank law was either revised or written de novo, while institutional objectives, practices, and structures were amended or created from scratch. In this article, we survey and quantify the trends in two major areas of central bank governance: independence and transparency. We document the steady progress toward greater central bank independence and transparency in a large number of industrial and developing countries over the past 10 to 15 years and discuss the effects of these aspects of governance on inflation. Finally, we touch on committee structure and decision making.

We describe some of the main features of the recent vintage of macroeconomic models used for monetary policy evaluation. We point to some of the key differences with respect to the earlier generation of macro models and highlight the insights for policy that these new frameworks have to offer. Our discussion emphasizes two key aspects of the new models: 1) the significant role of expectations of future policy actions in the monetary transmission mechanism and 2) the importance for the central bank of tracking the flexible price equilibrium values of the natural levels of output and the real interest rate. We argue that both features have important implications for the conduct of monetary policy.

At central banks around the world, including the Bank of England, Sweden's Riksbank, Norway's Norges Bank, and the Reserve Bank of New Zealand, policy is conducted on the basis of “inflation-forecast targeting”: the central bank constructs quantitative projections of the economy's expected future evolution based on the way in which it intends to control short-term interest rates, and public discussion of those projections plays a critical role in justifying the banks' conduct of monetary policy to the public. What accounts for the appeal of this approach? Should it be adopted more widely or more explicitly? I review the long-running debate between proponents of monetary rules and proponents of discretionary monetary policy and argue that inflation-forecast targeting represents a powerful synthesis of the two approaches. I explore some common questions that arise about inflation-forecast targeting and consider how the U.S. Federal Reserve might move toward an explicit policy of inflation-forecast targeting.

I survey the literature on monetary policy at the zero lower bound (ZLB) and effective lower bound (ELB) to make three main points: First, the Federal Reserve’s forward guidance and large-scale asset purchases are effective monetary policy tools at the ZLB/ELB. Second, during the 2008–15 U.S. ZLB period, the Fed was not very constrained in its ability to influence medium- and longer-term interest rates and the economy. And third, the risks of the Fed being significantly constrained by the ELB in the future are typically greatly overstated. I conclude that the Federal Reserve is not very constrained by the lower bound on nominal interest rates.

Constraints on the setting of short-term interest rates due to the effective lower bound are likely to bind more often in the future than in the past if the neutral real rate of interest remains in the neighborhood of 1 percent. This paper argues that the Federal Open Market Committee should commit to pursuing a “lower-for-longer” or “makeup” strategy for setting short-term rates when the zero bound binds. This strategy is consistent with the goal of targeting 2 percent inflation, on average, over the business cycle. A “lower-for-longer” approach would improve economic performance during zero-lower-bound episodes and avoid an erosion of inflation expectations.

The Federal Reserve on net purchased almost $4 trillion in additional securities between March 2009 and December 2014. Although the initial announcements of these policies were associated with dramatic market reactions, these responses were soon reversed. The overall market reaction to news surprises from the Federal Reserve over this period was increases, not decreases, in interest rates. It is hard to disentangle the effects of the purchases themselves from new information about economic fundamentals. My conclusion is that it is difficult to estimate accurately what large-scale asset purchases accomplished, but the magnitude of the effect is likely smaller than commonly believed.

This paper discusses whether monetary policy at the effective lower bound (ELB) is less effective, generates greater international spillovers, or is “stickier” than conventional monetary policy. It argues that monetary policy at the ELB can be potent and that there has thus far been no convincing evidence that it has greater international spillovers through capital flows and exchange rates than comparable adjustments in interest rates. It may be more challenging to raise rates off the ELB than to raise rates from higher levels—possibly due to counterbalancing effects through the exchange rate—although there are only anecdotes to support this stickiness rather than any formal, empirical evidence.

IT progress and its application to the financial industry have inspired central banks and academics to reflect about the merits of central bank digital currencies (CBDC) accessible to the broad public. This paper first briefly recalls the advantages that have been associated with CBDC and reviews some relevant background from the history of the issuance of different forms of central bank money. It then discusses two key arguments against CBDC, namely (i) risk of structural disintermediation of banks and centralization of the credit allocation process within the central bank and (ii) risk of facilitation systemic runs on banks in crisis situations. The paper proposes as solution a two-tier remuneration of CBDC, as a tested and simple tool to control the quantity of CBDC both in normal and crisis times. It is, however, also acknowledged that controlling the quantity of CBDC is not necessarily sufficient to control its impact on the financial system. Finally, the paper compares the financial account implications of CBDC with the one of crypto assets, stable coins, and narrow bank digital money, noting the similarity and differences in terms of implications on the financial system. It is concluded that well-controlled CBDC seems feasible, without this implying that CBDC would not catalyze change in the financial system.

Current discussions over the behavior of central banks show that more and more political leaders are demanding that the monetary authorities abandon a single-goal mandate of solely combating inflation. Many are considering a multi-goal commitment that would include not only concern with inflation, as had been the case before the global financial crisis. Central banks should also give due consideration to the problem of unemployment, income distribution and macro-prudential risks in their interest-rate setting. By looking at the experience of fourteen inflation-targeting countries since the global financial crisis, empirical evidence suggests that central banks have shifted significantly their behavior and have shown a high degree of pragmatism in dealing with the aftermath of the financial crisis, by loosening their focus on inflation. Using an alternative post-Keynesian analytical framework, the article then proceeds with an analysis of how central banks can effectively achieve a multi-goal commitment that would include full employment and a more equitable distribution of income in their pursuit of monetary policy.