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The advantage of transparency in monetary policy instruments

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  • Andrew Atkeson
  • Patrick J. Kehoe

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.

Suggested Citation

  • Andrew Atkeson & Patrick J. Kehoe, 2006. "The advantage of transparency in monetary policy instruments," Staff Report 297, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:297
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    References listed on IDEAS

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    Keywords

    Monetary policy ; Foreign exchange rates ; Inflation (Finance) - Mathematical models;

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