On the Optimal Choice of a Monetary Policy Instrument

34 Pages Posted: 14 Sep 2007 Last revised: 12 Aug 2010

See all articles by Andrew Atkeson

Andrew Atkeson

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER)

Varadarajan V. Chari

University of Minnesota - Twin Cities - Department of Economics; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Patrick J. Kehoe

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2007

Abstract

The optimal choice of a monetary policy instrument depends on how tight and transparent the available instruments are and on whether policymakers can commit to future policies. Tightness is always desirable; transparency is only if policymakers cannot commit. Interest rates, which can be made endogenously tight, have a natural advantage over money growth and exchange rates, which cannot. As prices, interest and exchange rates are more transparent than money growth. All else equal, the best instrument is interest rates and the next-best, exchange rates. These findings are consistent with the observed instrument choices of developed and less-developed economies.

Suggested Citation

Atkeson, Andrew G. and Chari, Varadarajan V. and Kehoe, Patrick J., On the Optimal Choice of a Monetary Policy Instrument (September 2007). NBER Working Paper No. w13398. Available at SSRN: https://ssrn.com/abstract=1014345

Andrew G. Atkeson (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Varadarajan V. Chari

University of Minnesota - Twin Cities - Department of Economics ( email )

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Federal Reserve Bank of Minneapolis ( email )

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National Bureau of Economic Research (NBER)

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Patrick J. Kehoe

Federal Reserve Bank of Minneapolis - Research Department ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States
612-204-5525 (Phone)
612-204-5515 (Fax)

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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