Working Paper: NBER ID: w13398
Authors: Andrew Atkeson; V. V. Chari; Patrick J. Kehoe
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.
Keywords: Monetary Policy; Interest Rates; Exchange Rates; Money Growth
JEL Codes: E3; E31; E4; E42; E51; E52; E58; E6; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tightness (F32) | effectiveness of monetary policy instruments (E52) |
| transparency (G38) | effectiveness of monetary policy instruments (E52) |
| interest rates (E43) | effectiveness of monetary policy instruments (E52) |
| exchange rates (F31) | effectiveness of monetary policy instruments (E52) |
| tightness of interest rates (E43) | advantage over money growth and exchange rates (F31) |
| transparency without commitment (D73) | advantage of interest rates and exchange rates over money growth (E49) |
| transparency of interest rates and exchange rates (E43) | preference over money growth (E41) |
| tightness of exchange rates (F31) | preference over money growth in absence of commitment (E41) |