The advantage of transparency in monetary policy instruments

Andrew Atkeson and Patrick Kehoe

No 297, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: Monetary policy instruments differ in tightness - how closely they are linked to inflation - and transparency - how easily they can be monitored. Tightness is always desirable in a monetary policy instrument; when is transparency? When a government cannot commit to follow a given policy. We apply this argument to a classic question: Is the exchange rate or the money growth rate the better monetary policy instrument? We show that if the instruments are equally tight and a government cannot commit to a policy, then the exchange rate's greater transparency gives it an advantage as a monetary policy instrument.

Keywords: Monetary policy; Foreign exchange rates; Inflation (Finance) - Mathematical models (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-pke
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:297

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