On the Optimal Choice of a Monetary Policy Instrument

Andrew Atkeson, Varadarajan Chari and Patrick Kehoe

No 13398, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The optimal choice of a monetary policy instrument depends on how tight and transparent the available instruments are and on whether policymakers can commit to future policies. Tightness is always desirable; transparency is only if policymakers cannot commit. Interest rates, which can be made endogenously tight, have a natural advantage over money growth and exchange rates, which cannot. As prices, interest and exchange rates are more transparent than money growth. All else equal, the best instrument is interest rates and the next-best, exchange rates. These findings are consistent with the observed instrument choices of developed and less-developed economies.

JEL-codes: E3 E31 E4 E42 E51 E52 E58 E6 E61 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG IFM ME
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Citations: View citations in EconPapers (17)

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Working Paper: On the optimal choice of a monetary policy instrument (2007)
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