The Optimal Choice of a Monetary Policy Instrument

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The Optimal Choice of a Monetary Policy Instrument

Author Info

Andrew Atkeson
Vyjayanthi Chari
Patrick Kehoe

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Abstract

Monetary policy instruments di¤er in tightness. how closely they are linked to in.a- tion. and transparency. how easily they can be monitored. Tightness is always desirable, while transparency is desirable only if policymakers cannot commit to future policies. We show that because interest rates can be made endogenously tight they have a natural advantage over both money growth and exchange rates. We also show that interest rates and exchange rates, because they are prices, are more transparent than money growth and thus have a natural advantage over money growth. Our model provides some insights into why developed economies tend to use inter- est rates as their primary policy instrument and why less-developed economies, in which interest rates are not available as an instrument, tend to use exchange rates.

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Paper provided by Laboratory for Macroeconomic Analysis in its series Working Papers with number CAS_RN_2007_1.

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Length: 33 pages
Date of creation: Nov 2007
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Handle: RePEc:cas:wpaper:cas_rn_2007_1

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This paper has been announced in the following NEP Reports:

NEP-ALL-2008-07-20 (All new papers)
NEP-CBA-2008-07-20 (Central Banking)
NEP-DGE-2008-07-20 (Dynamic General Equilibrium)
NEP-MAC-2008-07-20 (Macroeconomics)
NEP-MON-2008-07-20 (Monetary Economics)

References listed on IDEAS
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Cited by:
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Oleksiy Kryvtsov & Malik Shukayev & Alexander Ueberfeldt, 2008. "Adopting Price-Level Targeting under Imperfect Credibility: An Update," Working Papers 08-37, Bank of Canada. [Downloadable!]
Oleksiy Kryvtsov & Malik Shukayev & Alexander Ueberfeldt, 2008. "Adopting Price-Level Targeting under Imperfect Credibility," Working Papers 08-3, Bank of Canada. [Downloadable!]

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