its view of the economic outlook and the implications for monetary policy going forward. in january 2005, the fomc added a year to its semiannual public forecast of the outlook for growth and inflation, and by extending the horizon the forecast, provided greater insight into the inflation preferences of members of the committee. these changes in the transparency of the conduct of u. s. monetary policy have been motivated by a judgment that monetary policy works more effectively if the central bank is more explicit about its objectives, about its view of the outlook for growth and inflation, and about the framework it uses to make policy choices. since monetary policy operates through its effects not just on the overnight inter - bank rate but on expectation about the future path of that rate and other asset prices, greater disclosure about the fed ’ s forecast and the rationale for its decisions should help financial market prices reflect more accurately the future stance of monetary policy and make monetary policy more effective. greater transparency in this form cannot eliminate policy uncertainty, but it can reduce it to a level closer to what the members of the fomc individually confront. alongside these changes in the conduct of monetary policy, the fed today operates with a significantly greater degree of deference from the executive branch than was true for most of its history. executive branch officials do not comment publicly on the desirable course of monetary policy, and it would be unusual today for a white house or treasury official to admit to seeking to influence in private the actions of the chairman or the fomc. these improvements in the de facto degree of independence with which the fed operates are the result of changes in behavior and practice of the executive branch. they are not written into law. they probably were aided by improvements in monetary policy transparency and by the favorable results the fed has delivered under the past two chairmen. and they are in part the result of a broader recognition that monetary policy credibility depends significantly on both the de jure and de facto independence of the central bank. changes in practice based on knowledge and learning may be as important as what is established by law in contributing to the independence of the central bank. the formal institutional arrangements of the central banks around the world have changed more over the last few decades than those governing the fed. central bank independence is much more firmly established and more widespread. in many economies where central banks are not yet independent, there is substantial support for independence and tangible progress toward making that happen. alongside this evolution, central banks have become more transparent about their objectives and about

##agmatic case for independence is valid regardless of the economic context of the country at issue. it is compelling in countries that face the challenge of ending a period of high inflation, but also in countries that have achieved a sustained period of low inflation. it ’ s important for mature economies and for emerging markets. it is important regardless of the nature of the monetary policy and exchange rate regime, and the nature of the mandate given the central bank. the choice of regime – adoption of an inflation targeting framework, or the use of an exchange rate target as a nominal anchor, for example – may help improve credibility even for central banks that are not independent. but credibility is likely to be higher across different regimes where the central bank is truly independent. it will be higher, for example, for independent inflation targeting central banks, than for inflation targeters that are not independent. to say that the benefits of independence are essentially universal, however, doesn ’ t mean they are equivalent in magnitude across different contexts. where credibility is most vulnerable and the memory of default and high inflation more recent, the benefits of institutional independence for the central bank are likely to be substantial. the academic literature provides reasonably strong empirical support for these arguments in favor of central bank independence. independent central banks do, in fact, do a better job of achieving price stability. the greater the independence of the central bank, the lower the average level of inflation and the less volatile the inflation rate. these gains in inflation performance by independent central banks were not achieved at the expense of greater stability in output. or to put in differently, lower inflation did not bring about higher output volatility. credibility, where underpinned by independence, should reduce uncertainty, reduce the probability of a sustained rise in inflation, and therefore reduce output volatility. central bank independence is a necessary condition for effective monetary policy, but it ’ s not a sufficient condition. also important are the nature of the mandate given the central bank and the combination of flexibility and constraints that the mandate provides, the quality of the decisions made by the central bank over time in pursuing that mandate, and how the central bank communicates about policy. the experience of the federal reserve system in the united states provides an interesting prism through which to look at these dimensions of central banking. since the establishment of the central bank of the united states in 1914, we ’ ve had remarkable stability in the basic structure of the central bank, but of course u. s. inflation performance varied significantly over these nine decades