The Advantage of Transparency in Monetary Policy Instruments
Posted: 13 Aug 2008
Date Written: December 2001
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: Nominal Anchor, Exchange Rate Regime, Monetary Instrument, Time Consistency, Fixed Exchange Rates
JEL Classification: E5, E52, E61, F33, F41
Suggested Citation: Suggested Citation