The Advantage of Transparent Instruments of Monetary Policy

42 Pages Posted: 20 Dec 2001 Last revised: 22 Sep 2022

See all articles by Andrew Atkeson

Andrew Atkeson

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER)

Patrick J. Kehoe

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 2001

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.

Suggested Citation

Atkeson, Andrew G. and Kehoe, Patrick J., The Advantage of Transparent Instruments of Monetary Policy (December 2001). NBER Working Paper No. w8681, Available at SSRN: https://ssrn.com/abstract=294730

Andrew G. Atkeson (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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Patrick J. Kehoe

Federal Reserve Bank of Minneapolis - Research Department ( email )

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University of Minnesota - Twin Cities - Department of Economics ( email )

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