What Should Central Banks Do?

I the last twenty years, there has been substantial rethinking about how central banks should do their job. This rethinking has led to major changes in how central banks operate, and we are now in an era in which central banks in many countries throughout the world have had notable success—keeping inflation low, while their economies experience rapid economic growth. In this lecture, I outline what we think we have learned about how central banks should be set up to conduct monetary policy and then apply these lessons to see if there is room for institutional improvement in the way the Federal Reserve operates. The lecture begins by discussing seven guiding principles for central banks and then uses these principles to outline what the role of central banks should be. This framework is then used to see how the institutional features of the Fed measure up. I will take the view that despite the Fed’s extraordinarily successful performance in recent years, we should not be complacent. Changes in the way the Fed is set up to conduct its business may be needed to help ensure that the Fed continues to be as successful in the future.