On the optimality of transparent monetary policy

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On the optimality of transparent monetary policy

Author Info

Susan Athey
Andrew Atkeson
Patrick J. Kehoe

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Abstract

We analyze the optimal design of monetary rules. We suppose there is an agreed upon social welfare function that depends on the randomly fluctuating state of the economy and that the monetary authority has private information about that state. We suppose the government can constrain the policies of the monetary authority by legislating a rule. In general, well-designed rules trade-off the need to constrain policymakers from the standard time consistency problem arising from the temptation for unexpected inflation with the desire to give them flexibility to react to their private information. Surprisingly, we show that for a wide variety of circumstances the optimal rule gives the monetary authority no flexibility. This rule can be interpreted as a strict inflation targeting rule where the target is a prespecified function of publicly observed data. In this sense, optimal monetary policy is transparent.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 613.

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Date of creation: 2001
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Handle: RePEc:fip:fedmwp:613

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Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Joseph H. Haslag, 2001. "On Fed watching and central bank transparency in an overlapping generations model," Working Papers 00-02, Federal Reserve Bank of Dallas. [Downloadable!]
Manuel Amador & Ivan Werning & George-Marios Angeletos, 2003. "Commitment Vs. Flexibility," NBER Working Papers 10151, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Manuel Amador & George-Marios Angeletos & Ivan Werning, 2004. "Commitment vs. Flexibility," 2004 Meeting Papers 87, Society for Economic Dynamics. [Downloadable!]
- Manuel Amador & Iván Werning & George-Marios Angeletos, 2006. "Commitment vs. Flexibility," Econometrica, Econometric Society, vol. 74(2), pages 365-396, 03. [Downloadable!] (restricted)
Jon Faust & Eric Swanson & Jonathan Wright, 2004. "Do Federal Reserve Policy Surprises Reveal Superior Information about the Economy?," Contributions to Macroeconomics, Berkeley Electronic Press, vol. 4(1), pages 1246-1246. [Downloadable!] (restricted)

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