The Advantage of Transparent Instruments of Monetary Policy

Andrew Atkeson and Patrick Kehoe

No 8681, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Is the exchange rate or the money growth rate the better instrument of monetary policy? A common argument is that the exchange rate has a natural advantage because it is more transparent: it is easier for the public to monitor than the money growth rate. We formalize this argument in a simple model in which the government chooses which instrument it will use to target inflation. We find that when the government cannot commit to its policies, the greater transparency of the exchange rate makes it easier to provide the government with incentives to pursue good policies. Hence, transparency gives the exchange rate a natural advantage over the money growth rate as the monetary policy instrument.

JEL-codes: E5 E52 (search for similar items in EconPapers)
Date: 2001-12
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
Note: EFG IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Working Paper: The advantage of transparent instruments of monetary policy (2001)
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