Journal Article

How the World Achieved Consensus on Monetary Policy

Goodfriend, Marvin

2007

Overview

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.

• Publisher: American Economic Association
• Subject: American dollar / Central banks / Convergence / Credibility / Cross-national analysis / Economic fluctuations / Economic inflation / Economic policy / Economic theory / Employment / Federal Reserve Bank / Federal Reserve monetary policy / Foreign exchange markets / Foreign exchange rates / Inflation / Inflation expectations / Inflation rate / Inflation rates / Institutional aspects / Interest rate policy / Interest rates / Labor law / Monetary economics / Monetary history / Monetary policy / Monetary theory / Phillips curve / Policy analysis / Policy making / Recessions / Studies / Symposium: Monetary Policy / Transition economies / Unemployment / Volatility