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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.

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  • 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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    Cited by:

    1. Yang Lu & Ernesto Pasten & Robert King, 2013. "Policy design with private sector skepticism in the textbook New Keynesian model," 2013 Meeting Papers 241, Society for Economic Dynamics.
    2. Lu, Yang K. & King, Robert G. & Pasten, Ernesto, 2016. "Optimal reputation building in the New Keynesian model," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 233-249.
    3. Robert G. King & Yang K. Lu, 2020. "Managing Expectations in the New Keynesian Model," HKUST CEP Working Papers Series 202007, HKUST Center for Economic Policy.
    4. Sibert, Anne, 2006. "Is Central Bank Transparency Desirable?," CEPR Discussion Papers 5641, C.E.P.R. Discussion Papers.
    5. Alexandre Cunha, 2013. "On the relevance of floating exchange rate policies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(2), pages 357-382, June.

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    Keywords

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