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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 24, No. 4, pp.427-470
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2011
Received 30 Sep 2010 Revised 21 Oct 2010 Accepted 22 Oct 2010

Implementing Monetary Policy

Carl E. Walsh
Professor, Department of Economics, UC Santa Cruz, 1156 High St., Santa Cruz, CA 95064, USA, Tel: +1-831-459-4082, Fax: +1-831-459-5077 walshc@ucsc.edu

JEL Classification: E52, E58

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.

Keywords:

Monetary policy, Inflation targeting

Acknowledgments

This paper is based on one prepared for the 2010 Bank of Korea International Conference, May 31-June 1, 2010 which, in turn, draws from Walsh (2009b). I would like to thank Mark Carney, Jouko.Vilmunen, and Tony Yates for comments on earlier versions of some of this material.

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