NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Advantage of Transparent Instruments of Monetary Policy

Andrew Atkeson, Patrick J. Kehoe

NBER Working Paper No. 8681
Issued in December 2001
NBER Program(s):   EFG   IFM   ME

Is the exchange rate or the money growth rate the better instrument of monetary policy? A common argument is that the exchange rate has a natural advantage because it is more transparent: it is easier for the public to monitor than the money growth rate. We formalize this argument in a simple model in which the government chooses which instrument it will use to target inflation. We find that when the government cannot commit to its policies, the greater transparency of the exchange rate makes it easier to provide the government with incentives to pursue good policies. Hence, transparency gives the exchange rate a natural advantage over the money growth rate as the monetary policy instrument.

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Document Object Identifier (DOI): 10.3386/w8681

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