This analysis addresses changing views of the role and effectiveness of monetary policy, inflation targeting as an “effective monetary policy, ” monetary policy and short-run (output) stabilization, and problems in implementing a short-run stabilization policy. (JEL E520) Federal Reserve Bank of St. Louis Review, September/October 2007, 89(5), pp. 447-89. The effectiveness of monetary policy has been a long-standing question in the monetary economics and central banking literature. Perspectives on the question have been influenced in part by developments in monetary theory and in part by interpretations of monetary history. Progress in the discussion has also been influenced—indeed, some might say hindered—by changing definitions of both “monetary policy ” and “effectiveness.” Our discussion will address (i) changing views of the role and effectiveness of monetary policy, (ii) inflation targeting as an “effective monetary policy, ” (iii) monetary policy and shortrun (output) stabilization, and (iv) problems in implementing a short-run stabilization policy.

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