Report
The advantage of transparency in monetary policy instruments
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.
Keywords: Monetary policy; Foreign exchange rates; Inflation (Finance) - Mathematical models;
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Bibliographic Information
Provider: Federal Reserve Bank of Minneapolis
Part of Series: Staff Report
Publication Date: 2006
Number: 297