its lasting benefits, but i am sure that many other speakers will cover that ground. instead, in my remaining time, i will focus on some lessons that economists have drawn from the volcker regime regarding the importance of credibility in central banking and how that credibility can be obtained. as usual, the views i will express are my own and are not necessarily shared by my colleagues in the federal reserve system. volcker could not have accomplished what he did, of course, had he not been appointed to the chairmanship by president jimmy carter. in retrospect, however, carter ’ s appointment decision seems at least a bit incongruous. why would the president appoint as head of the central bank an individual whose economic views and policy goals ( not to mention personal style ) seemed, at least on the surface, quite different from his own? however, not long into volcker ’ s term, a staff economist at the board of governors produced a paper that explained why carter ’ s decision may in fact have been quite sensible from the president ’ s, and indeed the society ’ s, point of view. although the question seems a narrow one, the insights of the paper had far broader application ; indeed, this research has substantially advanced our understanding of the links among central bank credibility, central bank structure, and the effectiveness of monetary policy. insiders will have already guessed that the board economist to whom i refer is kenneth rogoff, currently a professor of economics at harvard, and that the paper in question is ken ’ s 1985 article, “ the optimal degree of commitment to an intermediate monetary target ” ( rogoff, 1985 ). 1 the insights of the rogoff paper are well worth recalling today. rather than considering the paper in isolation, however, i will place it in the context of two other classic papers on credibility and central bank design, an earlier work by finn kydland and edward prescott and a later piece by carl walsh. rogoff ’ s paper was widely circulated in 1982, a sad commentary on publication lags in economics. as i proceed, i will note what i see to be the important lessons and the practical implications of this line of research. 2 central bankers have long recognized at some level that the credibility of their pronouncements matters. i think it is fair to say, however, that in the late 1960s and 1970s, as the u. s. inflation crisis was building, economists and policymakers did not fully understand or appreciate the deter

ease lowers interest rates in the short run but raises them in the long run. let me emphasize again that these propositions reflected friedman ’ s view as of some thirty - five years ago. at the time, they were far from being the conventional wisdom, as suggested by the term “ counter - revolution ” in the essay ’ s title. what do we make of these propositions today? first, the empirical description of the dynamic effects of money on the economy given in the first six propositions would be viewed by most policymakers and economists today as being, as the british would put it, “ spot on ”. as a minor illustration of this point, in my own academic research i contributed to a large modern econometric literature that has used vector autoregression and other types of time series models to try to quantify how monetary policy affects the economy. the economic dynamics estimated by these methods correspond very closely to those outlined in friedman ’ s propositions. these methods confirm that a monetary expansion ( for example ) leads with a lag of one to two quarters to an increase in nominal income. perhaps more importantly, as friedman emphasized, the responses of the quantity and price components of nominal income have distinctly different timing. in particular, as friedman told us, a monetary expansion has its more immediate effects on real variables such as output, consumption, and investment, with the bulk of these effects occurring over two to three quarters. ( i was going to say, as friedman first told us, but perhaps the credit for that should go to david hume. milton ’ s work is, after all, part of a long and great tradition of classical monetary analysis. ) these real effects tend to dissipate over time, however, so that at a horizon of twelve to eighteen months the effects of a monetary expansion or contraction are felt primarily on the rate of inflation. the same patterns have been found in empirical studies for virtually all countries, not only by vector autoregression analysis but by more structural methods as well. they are reflected in essentially all contemporary econometric models used for forecasting and policy analysis, such as the frbus model at the federal reserve. the lag between monetary policy changes and the inflation response is the reason that modern inflation - targeting central banks, such as the bank of england, set a horizon of up to two years for achieving their inflation objectives. thus friedman ’ s description of the economic dynamics set in train by a monetary expansion or contraction, summarized in his