Much has happened in the world of central banking in the past decade. In this paper, I focus on three issues associated with the zero lower bound (ZLB) on short-term nominal interest rates and the nexus between monetary policy and financial stability: 1) whether we are moving toward a permanently lower long-run equilibrium real interest rate; 2) what steps can be taken to mitigate the constraints imposed by the ZLB; and 3) whether and how financial stability considerations should be incorporated in the conduct of monetary policy. These important topics deserve the attention of both academic and government professionals.

I stand here with deeply conflicting emotions. I am honored to be delivering this prestigious lecture. I am profoundly sad that Rudi Dornbusch, who should have delivered the Ely Lecture, died in July last year and that I am here in his place. So I would like to start by talking about Rudi. Rudi was born and grew up in Krefeld, Germany. He was an undergraduate at the University of Geneva, and completed his Ph.D. at the University of Chicago in 1971, which is where we met. He was a student of Robert Mundell, and both the subject matter – the development of the Mundell-Fleming model – and the elegance and insights of his early work reflected Mundell’s influence. He taught at the University of Rochester and at the University of Chicago before accepting an offer from MIT in 1975. In 1976, soon after coming to MIT, Rudi wrote his most famous and influential theoretical article, “Expectations and Exchange Rate Dynamics”. As Ken Rogoff said in his celebratory lecture on the 25 th anniversary of its publication, “The ‘overshooting’ paper … marks the birth of modern international macroeconomics.” From the late 1970s, Rudi became increasingly interested in policy issues. Within

The case for central-bank independence (CBI), while not a new one, has been strengthened by a growing body of empirical evidence, by recent developments in economic theory, and by the temper of the times. The case is a strong one,1 which is becoming part of the Washington orthodoxy. The purposes of this paper are both to make more precise the type of CBI that is likely to enhance economic performance, and to point to some remaining open issues and anomalies. I start with the two theoretical approaches to CBI.