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On the Optimal Choice of a Monetary Policy Instrument

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  • Andrew Atkeson
  • V. V. Chari
  • Patrick J. Kehoe

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13398.

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Date of creation: Sep 2007
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Handle: RePEc:nbr:nberwo:13398

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Cited by:
  1. Michael Dotsey & Andreas Hornstein, 2008. "On the implementation of Markov-perfect interest rate and money supply rules: global and local uniqueness," Working Papers 08-30, Federal Reserve Bank of Philadelphia.
  2. Oleksiy Kryvtsov & Malik Shukayev & Alexander Ueberfeldt, 2008. "Adopting Price-Level Targeting under Imperfect Credibility," Working Papers, Bank of Canada 08-3, Bank of Canada.
  3. Manuel Amador & Pierre Olivier Weill, 2008. "Learning from Prices: Public Communication and Welfare," 2008 Meeting Papers 390, Society for Economic Dynamics.
  4. Oleksiy Kryvtsov & Malik Shukayev & Alexander Ueberfeldt, 2008. "Adopting Price-Level Targeting under Imperfect Credibility: An Update," Working Papers, Bank of Canada 08-37, Bank of Canada.
  5. Virgiliu Midrigan, 2008. "Comment on "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety"," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2007, Volume 22, pages 355-365 National Bureau of Economic Research, Inc.
  6. Siagi Ayub Nteng’a & Ombui Kefa Andrew & Mukulu Elegwa, 2014. "Effect of the Structure of Guidance and Counselling Programme on the Performance of Commercial Banks in Kenya," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Scien, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 4(1), pages 57-76, January.

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