Part 3: Central Banking and the Conduct of Monetary Policy

Central banks play key economic roles in providing liquidity to the banking system, influencing money supply growth and interest rates, and determining monetary policy. The Federal Reserve, like its counterparts elsewhere, conducts monetary policy in the midst of on-going public debate about the independence of central banks, the objectives they should pursue, the policy instruments they should use, and the economic indicators they should monitor. While “Fed watchers” constantly attempt to divine the Fed’s next move, in recent years its policy process has become more transparent. In 2007-2008 the Fed initiated a number of extraordinary measures in response to financial market disruptions associated with weakness in subprime mortgage markets. The readings for Part 3 treat these issues.

1. Chapter 7:
   "Central Bank Independence: The Key to Price Stability ." Charles T. Carlstrom and Timothy S. Fuerst, Economic Commentary, Federal Reserve Bank of Cleveland, September 2006
2. Chapter 8:
   "U.S. Monetary Policy: An Introduction. Part 2: What Are the Goals of U.S. Monetary Policy?." FRBSF Economic Letter No. 2004-02, Federal Reserve Bank of San Francisco, January 23, 2004.

"Actions to Restore Financial Stability." Neil Willardson, The Region 22 (4), Federal Reserve Bank of Minneapolis, December 2008, 9-17.

"Negating the Inflation Potential of the Fed’s Lending Programs." Daniel L. Thornton, Economic Synopses, 2009 No. 30, Federal Reserve Bank of St. Louis, July 1, 2009.

"The Fed’s Monetary Policy Response to the Current Crisis." Glenn D. Rudebusch, FRBSF Economic Letter No. 2009-17, Federal Reserve Bank of San Francisco, May 22, 2009.

"Monetary Policy and Asset Prices." Kevin J. Lansing, FRBSF Economic Letter No. 2008-34, Federal Reserve Bank of San Francisco, October 31, 2009.

"Financial Crisis in S, M and L." Rajeev Bhaskar and Yadav Gopalan, The Regional Economist, Federal Reserve Bank of St. Louis, April 2009, 13-18.

"U.S. Monetary Policy: An Introduction. Part 4: How Does the Fed Decide the Appropriate Setting for the Policy Instrument?." FRBSF Economic Letter No. 2004-04, Federal Reserve Bank of San Francisco, February 6, 2004.

"Uncertainty and Monetary Policy." .” Richard Dennis, FRBSF Economic Letter No. 2005-33, Federal Reserve Bank of San Francisco, November 30, 2005.

"The Taylor Rule: A Guidepost for Monetary Policy?." Charles T. Carlstrom and Timothy S. Fuerst, Economic Commentary, Federal Reserve Bank of Cleveland, July 2003.

"Publishing Central Bank Interest Rate Forecasts." Glenn D. Rudebusch, FRBSF Economic Letter No. 2008-02, Federal Reserve Bank of San Francisco, January 25, 2008.

"Reflections on Monetary Policy: Flexibility, Transparency, and Inflation." Michael H. Moskow, Chicago Fed Letter No. 230, Federal Reserve Bank of Chicago, September 2006.